Martin Kliem

Bayesian estimation of a dynamic stochastic general equilibrium model with asset prices

This paper presents a novel Bayesian method for estimating dynamic stochastic general equilibrium (DSGE) models subject to a constrained posterior distribution for the implied Sharpe ratio. We apply our methodology to a DSGE model with habit formation in consumption and leisure, and show that the constrained estimation produces both reasonable asset‐pricing and business‐cycle implications. Next, we estimate the Smets–Wouters model subject to the same Sharpe ratio constraint. The results move the model closer to reproducing observed risk premia, but at increasing cost to its macroeconomic performance.

Un)expected Monetary Policy Shocks and Term Premia

The term structure of interest rates is crucial for the transmission of monetary policy to financial markets and the macroeconomy. Disentangling the impact of monetary policy on the components of interest rates, expected short rates and term premia, is essential to understanding this channel. To accomplish this, we provide a quantitative structural model with endogenous, time-varying term premia that are consistent with empirical findings. News about future policy, in contrast to unexpected policy shocks, has quantitatively significant effects on term premia along the entire term structure. This provides a plausible explanation for partly contradictory estimates in the empirical literature.