Government spending volatility shocks drive up bond risk premiums at ZLB.
The article explores how changes in government spending affect bond risk premiums. It uses a model to show that when government spending goes up or becomes more unpredictable, bond risk premiums increase. This means that bonds may not be as good at protecting your money when government spending is unstable. The study also finds that when interest rates are already very low, the impact of government spending changes on bond risk premiums is even stronger.