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Time-Varying Risk Aversion and Inflation-Consumption Correlation in an Equilibrium Term Structure Model

Tilman Bletzinger et al.

Journal of Financial Econometrics2025https://doi.org/10.1093/jjfinec/nbae038article
AJG 3ABDC A*
Weight
0.37

Abstract

Inflation risk premiums tend to be positive in an economy mainly hit by supply shocks, and negative if demand shocks dominate. Risk premiums also fluctuate with risk aversion. We shed light on this nexus in a linear-quadratic equilibrium macro-finance model featuring time variation in inflation-consumption correlation and risk aversion. We obtain analytical solutions for real and nominal yield curves and for risk premiums. While changes in the inflation-consumption correlation drive nominal yields, changes in risk aversion drive real yields and act as amplifier on nominal yields. Combining a trend-cycle specification of real consumption with hysteresis effects generates an upward-sloping real yield curve. Estimating the model on U.S. data from 1961 to 2019 confirms substantial time variation in inflation risk premiums: distinctly positive in the earlier part of our sample, especially during the 1980s, and turning negative with the onset of the new millennium.

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https://doi.org/https://doi.org/10.1093/jjfinec/nbae038

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@article{tilman2025,
  title        = {{Time-Varying Risk Aversion and Inflation-Consumption Correlation in an Equilibrium Term Structure Model}},
  author       = {Tilman Bletzinger et al.},
  journal      = {Journal of Financial Econometrics},
  year         = {2025},
  doi          = {https://doi.org/https://doi.org/10.1093/jjfinec/nbae038},
}

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Evidence weight

0.37

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.16 × 0.4 = 0.06
M · momentum0.53 × 0.15 = 0.08
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

† Text relevance is estimated at 0.50 on the detail page — for your query’s actual relevance score, open this paper from a search result.