Targeting Long Rates in a Model with Segmented Markets

Charles Carlstrom, Timothy Fuerst and Matthias Paustian

American Economic Journal: Macroeconomics, 2017, vol. 9, issue 1, 205-42

Abstract: This paper develops a model of segmented financial markets in which the net worth of financial institutions limits the degree of arbitrage across the term structure. The model is embedded into the canonical Dynamic New Keynesian (DNK) framework. We estimate the model using data on the term premium. Our principal results include the following. First, the estimated segmentation coefficient implies a nontrivial effect of central bank asset purchases on yields and real activity. Second, there are welfare gains to having the central bank respond to the term premium, e.g., including the term premium in the Taylor Rule. Third, a policy that directly targets the term premium sterilizes the real economy from shocks originating in the financial sector. A term-premium peg can have significant welfare effects.

JEL-codes: E12 E23 E31 E43 E44 E52 E58 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/mac.20150179
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (100)

Downloads: (external link)
https://www.aeaweb.org/articles?id=10.1257/mac.20150179 (application/pdf)
https://www.aeaweb.org/articles/attachments?retrie ... SWBYSI1A_gRz2A4mZ_GQ (application/zip)
https://www.aeaweb.org/articles/attachments?retrie ... aSKX79LSptJoYrrQs8GS (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: Targeting Long Rates in a Model with Segmented Markets (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmac:v:9:y:2017:i:1:p:205-42

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Journal: Macroeconomics is currently edited by Simon Gilchrist

More articles in American Economic Journal: Macroeconomics from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().