text: Printed from https://ideas.repec.org/p/hbs/wpaper/14-031.html
  Our new model of consumption-based habit formation preferences generates loglinear, homoscedastic macroeconomic dynamics and time-varying risk premia on bonds and stocks. Consumers' first-order condition for the real risk-free interest rate takes the form of an exactly loglinear consumption Euler equation, commonly assumed in New Keynesian models. Estimating the model separately for 1979-2001 and 2001-2011 explains why the exposure of US Treasury bonds to the stock market changed from positive to negative. A change in the comovement between inflation and the output gap explains changing bond risks, but only when risk premia change endogenously as predicted by the model.
  Handle: RePEc:hbs:wpaper:14-031
  File URL: http://www.hbs.edu/faculty/pages/download.aspx?name=14-031.pdf
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