We build a small-scale representation of an economy in which the short rate, inflation and output exhibit unobserved secular and cyclical components that both drive bond yields. We impose the economic restriction that expected bond returns are purely cyclical so that their variance does not...

The leverage of financial broker-dealers responds to demand- and supply-like shocks. Supply shocks relax their funding constraint and raise leverage, while demand shocks also raise leverage but tighten the constraint. The shocks play opposite roles in financial markets. Leverage supply shocks...