Scott Joslin

This paper connects two highly concerning world problems today – inflation and widening inequality. It identifies a granular origin of widening inequality using two stages. First, low-income individuals are systematically exposed to higher cost of living relative to high-income individuals. Second, this "inflation gap" manifests in the gradual future widening gaps in the relative frequency of low-income individuals with (a) lower ownership of real estate, (b) higher credit card debt balances, (c) no health insurance, (d) poorer health conditions, (e) lower educational attainment, (f) higher real estate rental, as well as (g) higher frequency of property crimes. Using micro-level data, when available, we also document causal linkages between current inflation gaps and future widening inequality.

We analyze the term structure of Treasury liquidity premium (LP). Through a model

where illiquidity shocks are alleviated by holding Treasuries, we show that LP term

structure is shaped by expectations of future market liquidity, liquidity term premium, and Treasury supply. As predicted, the LP term structure is downward-sloping

in recessions but upward-sloping in booms, and forward LP predicts future LP and

market liquidity. Furthermore, LP is quantitatively important for monetary policy

pass-through: LP dampens the pass-through of interest rate policy yet strengthens

the pass-through of quantitative easings. We also use LP to infer the term structure

of Treasury safety premium.

We propose a new class of no-arbitrage term structure models with stochastic volatility. This class of models allow for tractable pricing of bonds. We show how standard affine term structure models are unable to capture violations of the expectations hypothesis due to predictable forecast errors. In contrast, the almost-affine class is consistent with both historical variation in volatility and the observed violations of the expectation hypothesis.