A Jump-Diffusion Nominal Short Rate Model
Posted: 13 Oct 2008 Last revised: 3 Apr 2012
Date Written: February 16, 2010
This paper extends the monetary equilibrium approach of Lioui and Poncet (2004) to a jump-diffusion setting. We show that in the presence of jumps money non-neutrality is preserved and the jump component of the inflation risk premium is affected, in addition to technology factors, by monetary policy variables. Furthermore, we derive, based on our framework, the jump-diffusion dynamics of a nominal short interest rate.
Keywords: E31, E43, G12
JEL Classification: Interest rate model, monetary equilibrium, jump-diffusion
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