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The term premium in a small open economy: A micro-founded approach

Alex Ilek () and Irit Rozenshtrom

International Review of Economics & Finance, 2018, vol. 57, issue C, 333-352

Abstract: We study the term premium on government bonds in a small open economy within a micro-founded DSGE model with Epstein–Zin preferences. A model with technological spillovers from the global economy to the small open economy succeeds in replicating the main macroeconomic and bond-pricing moments as well as international co-movement in accordance with the data. We identify two opposing effects of the openness of the economy on the nominal term premium, which in our model roughly offset each other, so that the term premia in the open and closed economies are similar, provided that both enjoy technological spillovers from abroad.

Keywords: Term premium; Open economy; DSGE models; Technological spillovers; Epstein–Zin preferences (search for similar items in EconPapers)
JEL-codes: E4 F3 F4 G1 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.iref.2018.02.002

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Handle: RePEc:eee:reveco:v:57:y:2018:i:c:p:333-352