The Tail that Keeps the Riskless Rate Low

Abstract

We thank Jonathan Parker, Marty Eichenbaum and Mark Gertler for helpful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w24362.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The Tail That Wags the Economy: Beliefs and Persistent Stagnation

“…Thus, the model under-predicts the drop. In Kozlowski et al (2018), we show how liquidity considerations can amplify the drop in government bond yields from higher tail risk.…”

The causes and challenges of low interest rates: insights from basic principles and recent literature

“…Why does a crisis that happened more than a decade ago continue to affect asset prices today? Kozlowski et al (2018, 2020) provide an explanation. They assume that agents do not know the true distribution of shocks and learn it from data nonparametrically.…”

COVID-19: Scarring Body and Mind

“…Parameterization. To set values for the liquidity parameters, we follow the strategy in Kozlowski et al (2018). We use the following functional form for the benet to invest on liquid assets:…”

“…Thus, an increase in the risk of such a shock makes capital liquidity uncertain and raises the value of riskless bonds, which are always retain their full, liquid value. Thus, higher 17 See alsoKozlowski et al (2018). Realized default does not respond much to beliefs.Results show with scarring of beliefs (solid line) and without (dashed line), often with the two lines on top of each other.…”