Recent research has found that the dynamics of the New Keynesian model are very different when the nominal interest rate is zero. Positive technology shocks and negative shocks to the labor tax rate lower economic activity and the size of the government purchase multiplier can be as large as four. We consider the empirical relevance of these dynamics using Japanese data. We find that when one uses a nonlinear solution method, the qualitative properties of the model depend on the size of the shock. For moderate sized shocks the New Keynesian model exhibits orthodox dynamics and the size of the government purchase multiplier is less than one. We document that specifications with moderate shocks are most consistent with Japanese data.
Is there asymmetry in the distribution of government bond returns in developed countries? Can asymmetries be predicted using financial and macroeconomic variables?To answer the first question, we provide evidence for asymmetry in government bond returns in particular for short maturities. This finding has important implications for modelling and forecasting government bond returns. For example, widely used models for yield curve analysis such as the affine term structure model assume symmetrically distributed innovations. To answer the second question, we find that liquidity in government bond markets predicts the coefficient of skewness with a positive sign, meaning that the probability of a large and negative excess return is more likely in a less liquid market. In addition, a positive realized return is associated with a negative coefficient of skewness, or a small probability of a large and negative return in the future. AbstractIs there asymmetry in the distribution of government bond returns in developed countries? Can asymmetries be predicted using financial and macroeconomic variables? To answer the first question, we provide evidence for asymmetry in government bond returns in particular for short maturities. This finding has important implications for modelling and forecasting government bond returns. For example, widely used models for yield curve analysis such as the affine term structure model assume symmetrically distributed innovations. To answer the second question, we find that liquidity in government bond markets predicts the coefficient of skewness with a positive sign, meaning that the probability of a large and negative excess return is more likely in a less liquid market. In addition, a positive realized return is associated with a negative coefficient of skewness, or a small probability of a large and negative return in the future.
Is there asymmetry in the distribution of government bond returns in developed countries? Can asymmetries be predicted using financial and macroeconomic variables? To answer the first question, we provide evidence for asymmetry in government bond returns in particular for short maturities. This finding has important implications for modelling and forecasting government bond returns. For example, widely used models for yield curve analysis such as the affine term structure model assume symmetrically distributed innovations. To answer the second question, we find that liquidity in government bond markets predicts the coefficient of skewness with a positive sign, meaning that the probability of a large and negative excess return is more likely in a less liquid market. In addition, a positive realized return is associated with a negative coefficient of skewness, or a small probability of a large and negative return in the future.
We measure asymmetries in the distribution of bond returns and exchange rates and test their statistical significance. Asymmetries are sizable when measured by the coefficient of skewness, a measure that is highly affected by outliers. In contrast, robustly measured asymmetries to outliers often disagree in sign or size, implying that much of the asymmetries measured by the coefficient of skewness can be attributed to extreme observations. Asymmetries in many government bonds returns are only statistically significant according to tests based on the coefficient of skewness. On the contrary, only tests based on robust measures indicate statistically significant asymmetries in the exchanges rates of Japanese Yen, a major funding currency for carry trades, as well as in New Zealand Dollar and Australian Dollar, major investing currencies for carry trades. This observation suggests that sources of asymmetry in carry trades and in government bond returns can be fundamentally different.
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