Macroeconomic Linkages between Monetary Policy and the Term Structure of Interest Rates

39 Pages Posted: 16 Feb 2014 Last revised: 21 Feb 2014

See all articles by Howard Kung

Howard Kung

London Business School; Centre for Economic Policy Research (CEPR)

Date Written: February 9, 2014

Abstract

This paper studies the equilibrium term structure of nominal and real interest rates and time-varying bond risk premia implied by a stochastic endogenous growth model with imperfect price adjustment. The production and price-setting decisions of firms drive low-frequency movements in growth and inflation rates that are negatively related. With recursive preferences, these growth and inflation dynamics are crucial for rationalizing key stylized facts in bond markets. When calibrated to macroeconomic data, the model quantitatively explains the means and volatilities of nominal bond yields and the failure of the expectations hypothesis.

Keywords: Term structure of interest rates, asset pricing, recursive preferences, monetary policy, endogenous growth, inflation, productivity

JEL Classification: E43, E44, G12, G18

Suggested Citation

Kung, Howard, Macroeconomic Linkages between Monetary Policy and the Term Structure of Interest Rates (February 9, 2014). Available at SSRN: https://ssrn.com/abstract=2393234 or http://dx.doi.org/10.2139/ssrn.2393234

Howard Kung (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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