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The Macroeconomics of the Term Structure of Interest Rates
Stockholm University, Faculty of Social Sciences, Department of Economics.
2009 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This thesis consists of four papers, summarized as follows.

"The Term Structure of Interest Rates and the Monetary Transmission Mechanism"

This paper provides empirical evidence that the term structure of interest rates is an integral part of the monetary transmission mechanism. We amend the standard New Keynesian model to generate an endogenous term structure where movements in the term structure have a direct effect on agents' spending decisions. The model features bond market segmentation through adjustment costs for bond holdings and transaction costs between money and bonds. The model is able to replicate the main stylized facts concerning the relation between output and the yield spread.

"Monetary Aggregates, Long-Term Interest Rates and the Monetary Transmission Mechanism in the Euro Area"

We study the relation between money demand shocks and bond yields in the Euro area. We use Bayesian methods to estimate the general-equilibrium model of Marzo, Söderström and Zagaglia where bond prices are an integral part of the monetary transmission mechanism. Taking into account the impact of bond yields on the macroeconomy generates superior in-sample and out-of-sample forecasts for output, inflation and bond yields. The paper also shows that money velocity shocks matter for explaining the dynamics of long-term rates.

"Determinacy of Interest Rate Rules with Bond Transaction Services in a Cashless Economy"

We consider a cashless New Keynesian model with two types of government bonds. One bond provides transaction services, whereas the other is used only as a store of value. Contrary to Canzoneri and Diba (2005), we show that the Taylor principle is still sacrosant. In general, the results of Leeper (1991) are confirmed.

"Money-market segmentation in the Euro area: What has changed during the turmoil?"

This paper studies how the pattern of segmentation in the Euro area money market has been affected by the recent turmoil in financial markets. I use nonparametric estimates of realized volatility to test for volatility spillovers between rates at different maturities. Exogeneity tests from VAR models suggest that the transmission channel from longer maturities to the overnight disappears from August 9, 2007. Quantile measures of comovements report evidence of an increase in contagion within the longer end of the money market curve.

Place, publisher, year, edition, pages
Stockholm: Department of Economics, Stockholm University , 2009. , 228 p.
Series
Dissertations in Economics (Stockholm), ISSN 1404-3491 ; 2009:3
Keyword [en]
term structure of interest rates, monetary policy, money market
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:su:diva-27230ISBN: 978-91-7155-875-6 (print)OAI: oai:DiVA.org:su-27230DiVA: diva2:213041
Public defence
2009-06-02, hörsal 3, hus B, Universitetsvägen 10 B, 10:00 (English)
Opponent
Supervisors
Available from: 2009-05-12 Created: 2009-04-27 Last updated: 2009-05-11Bibliographically approved
List of papers
1. The Term Structure of Interest Rates and the Monetary Transmission Mechanism
Open this publication in new window or tab >>The Term Structure of Interest Rates and the Monetary Transmission Mechanism
(English)Manuscript (Other academic)
Abstract [en]

We provide empirical evidence that the term structure of interest rates is an integral part of the monetary transmission mechanism. Based on these findings, we amend the standard monetary business cycle model to generate an endogenous term structure of interest rates where movements in the term structure (and in term premia) have a direct effect on private agents' spending decisions. The model features bond market segmentation through adjustment costs for bond holdings and transaction costs between money and bonds. Our model is able to replicate the main stylized facts concerning the relation between output fluctuations and the yield spread: the negative correlation between the yield spread and the output gap and the positive correlation between the yield spread and future output growth. Furthermore, the model implies that movements in term premia are negatively correlated with future output growth, in line with recent evidence.

Keyword
Monetary policy, Yield curve, Term premia
National Category
Economics
Research subject
Economics
Identifiers
urn:nbn:se:su:diva-27647 (URN)
Available from: 2009-05-11 Created: 2009-05-11 Last updated: 2010-01-14Bibliographically approved
2. Monetary Aggregates, Long-Term Interest Rates and the Monetary Transmission Mechanism in the Euro Area
Open this publication in new window or tab >>Monetary Aggregates, Long-Term Interest Rates and the Monetary Transmission Mechanism in the Euro Area
(English)Manuscript (Other academic)
Abstract [en]

Between 2001 and 2004 massive portfolio shifts took place in the Euro area from equity to money balances. The European Central Bank (ECB, 2004) suggests that this was caused by heightened risk aversion in the wake of financial market instability. Although the relation between these portfolio shifts and movements in equity prices has been investigated (see ECB, 2003), there are no studies focusing on government bonds. In this paper, I consider the relation between money demand shocks and bond yields. I use Bayesian methods to estimate the general-equilibrium model of Marzo, Söderström and Zagaglia (2008) where bond prices are an integral part of the monetary transmission mechanism. I show that taking into account the impact of bond yields on the macroeconomy generates superior in-sample and out-of-sample forecasts for output, inflation and for bond yields. I also find that, besides shocks to monetary policy and the inflation target, money demand shocks matter for explaining the dynamics of long-term interest rates.

National Category
Economics
Research subject
Economics
Identifiers
urn:nbn:se:su:diva-27651 (URN)
Projects
Monetary policy, yield curve, term premia
Available from: 2009-05-11 Created: 2009-05-11 Last updated: 2010-01-14Bibliographically approved
3. Determinacy of interest rate rules with bond transaction services in a cashless economy
Open this publication in new window or tab >>Determinacy of interest rate rules with bond transaction services in a cashless economy
(English)Manuscript (Other academic)
Abstract [en]

Canzoneri and Diba (2004) show that the Taylor principle is not a panacea for equilibrium determinacy in a model where bonds and money provide liquidity services to households. We consider a cashless New Keynesian model with two types of government bonds. One bond provides transaction services, whereas the other is used only as a store of value. We show that the Taylor principle is still sacrosant. In general, the results of Leeper (1991) are confirmed.

National Category
Economics
Research subject
Economics
Identifiers
urn:nbn:se:su:diva-27653 (URN)
Available from: 2009-05-11 Created: 2009-05-11 Last updated: 2010-01-14Bibliographically approved
4. Money-market segmentation in the Euro area: What has changed during the turmoil?
Open this publication in new window or tab >>Money-market segmentation in the Euro area: What has changed during the turmoil?
(English)Manuscript (Other academic)
Abstract [en]

I study how the pattern of segmentation in the Euro area money market has been affected by the recent turmoil in ¯nancial markets. I use nonparametric estimates of realized volatility to test for volatility spillovers between rates at different maturities. For the pre-turmoil period, exogeneity tests from VAR models suggest the presence of a transmission channel from longer maturities to the overnight. This disappears in the subsample starting in August 9 2007. The results of the semiparametric tests of Cappiello, Gerard and Manganelli (2005) report evidence of an increase in volatility contagion within the longer end of the money market curve. However this takes place in the lower tail of the empirical distributions.

National Category
Economics
Research subject
Economics
Identifiers
urn:nbn:se:su:diva-27654 (URN)
Projects
Money market, high-frequency data, time-series methods
Available from: 2009-05-11 Created: 2009-05-11 Last updated: 2010-01-14Bibliographically approved

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