Do term premiums matter? Transmission via exchange rate dynamics

Mitsuru Katagiri and Koji Takahashi

No 971, BIS Working Papers from Bank for International Settlements

Abstract: The macroeconomic effect of term premiums is a controversial issue both theoretically and quantitatively. In this paper, we explore the possibility that term premiums affect inflation and the real economy via exchange rate dynamics. For this purpose, we construct a small open economy model with limited asset market participation, focusing on the empirical observation that uncovered interest parity holds better for longer-term interest rate differentials. A quantitative exercise using Japanese and U.S. data shows that changes in term premiums, particularly those made by the central bank's bond purchases, have sizable effects on Japanese inflation rates via exchange rate dynamics.

Keywords: term premium; uncovered interest rate parity; quantitative easing (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2021-10
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Do Term Premiums Matter? Transmission via Exchange Rate Dynamics (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:971

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