How Do Monetary Policy Rules Affect Term Premia?

Hibiki Ichiue ()

No 05-E-14, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper derives analytical solutions for interest rate term structures in a new Keynesian framework. Theoretically, we consider the conditions for the positive average slope of nominal term structure, and show that the slope of a real one is positive. We then calibrate the model to find the following results. First, term premia represents compensation for risk of time-variation in IS shock rather than cost-push and monetary policy shocks. Second, a small slope of the Phillips curve is needed for a positive slope of the term structure. Third, the term structure of the inflation premium is downward on average. Finally, a less aggressive response to output gap in the monetary policy rule leads to lower term premia. The implication for the recent low long rate is also discussed.

Keywords: Term Structure of Interest Rate; Monetary Policy Rule; New Keynesian Model; Term Premium; Inflation Premium (search for similar items in EconPapers)
JEL-codes: E43 E52 (search for similar items in EconPapers)
Date: 2005-10
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Persistent link: https://EconPapers.repec.org/RePEc:boj:bojwps:05-e-14

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