A Monetary Explanation of the Term Structure of Interest Rates and Bond Risk Premia
Texas A&M University - Mays Business School
Agnes J. Moon
University of Southern California - Marshall School of Business - Finance and Business Economics Department
March 14, 2009
AFA 2010 Atlanta Meetings Paper
This paper presents a monetary model of the term structure of interest rates. This model is intended to explain the stylized facts in Treasury yields including counter cyclical variations of bond risk premia without challenging both short-run and long-run monetary facts. To this end, we study the roles of a segmented asset market, habit formation, and inflation targeting in a cash-in-advance model. We provide a monetary general equilibrium justification of an affine term structure model with a flexible market price of risk. Quantitative results show that the model can capture the features in the nominal term structure.
Number of Pages in PDF File: 52
Keywords: Term structure, Segmented asset market, Habit formation, Imperfect nominal indexation, Bond risk premia
JEL Classification: G12, E43, E44working papers series
Date posted: January 11, 2007 ; Last revised: October 18, 2011
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