Monetary Policy, Segmentation, and the Term Structure

Rohan Kekre, Moritz Lenel and Federico Mainardi
Additional contact information
Moritz Lenel: Princeton and NBER
Federico Mainardi: Chicago Booth

Working Papers from Princeton University. Economics Department.

Abstract: We develop a segmented markets model which rationalizes the effects of monetary policy on the term structure of interest rates. As in the preferred habitat tradition, habitat investors and arbitrageurs trade bonds of various maturities. As in the intermediary asset pricing tradition, the wealth of arbitrageurs is a state variable which affects equilibrium term premia. When arbitrageurs’ portfolio features positive duration, an unexpected fall in the short rate revalues wealth in their favor and compresses term premia. A calibration to the U.S. economy accounts for the effects of monetary shocks along the yield curve. We discuss the additional implications of our framework for state-dependence, endogenous price volatility, and trends in term premia from a declining natural rate.

Keywords: monetary policy; term structure; segmented markets (search for similar items in EconPapers)
JEL-codes: E44 E63 G12 (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-cba and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Monetary Policy, Segmentation, and the Term Structure (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2023-08

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