The Term Structure of Interest Rates and the Monetary Transmission Mechanism
(English)Manuscript (Other academic)
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.
Monetary policy, Yield curve, Term premia
Research subject Economics
IdentifiersURN: urn:nbn:se:su:diva-27647OAI: oai:DiVA.org:su-27647DiVA: diva2:216718