 The impact of monetary policy on bond returns: A segmented markets approachBruce Mizrach and Filippo Occhino Journal of Economics and Business, 2008, vol. 60, issue 6, 485-501 Abstract: This paper assesses the contribution of monetary policy to the dynamics of bond real returns. We assume that the monetary authority controls the short-term nominal interest rate. We then model exogenously the joint dynamics of the aggregate endowment and the monetary policy variable, and determine bond real returns endogenously. Market segmentation is introduced by permanently excluding a fraction of households from financial markets. When markets are segmented, monetary policy has a liquidity effect on the participants' consumption and marginal utility, on the stochastic discount factor, and on real returns. Data on bond returns strongly favor the segmented markets model over the full participation model. For maturities up to 2 years, the segmented markets model is able to replicate the sign and the size of the impulse response of bond returns to monetary policy shocks, it correctly predicts the sign of their autocorrelation, and it closely matches their volatility as a function of maturity. Keywords: Bond; returns; volatility; Limited; participation; Segmented; markets; Monetary; policy; shocks (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:60:y:2008:i:6:p:485-501 Access Statistics for this article Journal of Economics and Business is currently edited by Emanuele Bajo and Moritz Ritter More articles in Journal of Economics and Business from Elsevier |
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