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Asset prices reflect anticipations of future growth. We examine the asset pricing implications of a production economy whose long-term growth prospects are endogenously determined by innovation and R&D. In equilibrium, R&D endogenously drives a small, persistent component in productivity which generates long-run uncertainty about economic growth. With recursive preferences, households fear that persistent slowdowns in economic growth are accompanied by low asset valuations and command high risk premia in asset markets. Empirically, we find substantial evidence for innovation-driven low-frequency movements in aggregate growth rates and asset market valuations. In short, equilibrium growth is risky.

JEL classification: E43 E44 G12 G18 Keywords:Term structure of interest rates Asset pricing Recursive preferences Monetary policy Endogenous growth Inflation Productivity a b s t r a c t This paper studies the equilibrium term structure of nominal and real interest rates and the time-varying bond risk premia implied by a stochastic endogenous growth model with imperfect price adjustment and monetary policy shocks. The production and pricesetting decisions of firms drive low-frequency movements in growth and inflation rates that are negatively related. With recursive preferences, these growth and inflation dynamics are crucial for rationalizing key stylized facts in bond markets. When calibrated to macroeconomic data, the model quantitatively explains the means and volatilities of nominal bond yields and the failure of the expectations hypothesis.Please cite this article as: Kung, H., Macroeconomic linkages between monetary policy and the term structure of interest rates. Journal of Financial Economics (2014), http://dx.

; AbstractWe construct and estimate a model that features endogenous growth and technology diffusion. The spillover effects from research and development provide a link between business cycle fluctuations and long-term growth. Therefore, productivity growth is related to the state of the economy. Shocks to the marginal efficiency of investment explain the bulk of the low-frequency variation in growth rates. Transitory inflationary shocks lead to persistent declines in economic growth. During the Great Recession, technology diffusion dropped sharply, while long-term growth was not significantly affected. The opposite occurred during the 2001 recession. The growth mechanism induces positive comovement between consumption and investment.