Labor Rigidity, Inflation Risk and Bond Returns

Abstract

This paper exploits information from the variance-ratios of macroeconomic variables to infer about the short and long-run components of dividend risk and ination risk. While labor rigidity shifts dividend risk towards the short horizon, it also reveals {by means of labor-share variation{ the component of ination risk which is correlated with fundamentals. A simple general equilibrium model with labor rigidity can explain how ination interacts with the real growth and the labor-share, as well as many patterns of the term-structures of real and nominal bond yields. The model is robust to many properties of equity returns.