Term Premium Dynamics and the Taylor Rule

Michael Gallmeyer, Burton Hollifield (), Francisco Palomino and Stanley Zin
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Burton Hollifield: Tepper School of Business, Carnegie Mellon University, Pittsburgh, PA 15213, USA
Stanley Zin: Stern School of Business, New York University, New York, NY 10012, USA5National Bureau of Economic Research, USA

Quarterly Journal of Finance (QJF), 2017, vol. 07, issue 04, 1-39

Abstract: We explore the bond-pricing implications of an exchange economy where preference shocks result in time-varying term premiums in real yields with a Taylor rule determining inflation dynamics and nominal term premiums. We calibrate the model by matching the term structure of the means and volatilities of nominal yields. Unlike a model with exogenous inflation, a Taylor rule matching empirical properties of inflation leads to nominal term premiums that are volatile at long maturities. Increasing monetary policy aggressiveness decreases the level and volatility of nominal yields.

Keywords: Affine term structure; general equilibrium; time-varying term premiums; monetary policy (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (6)

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DOI: 10.1142/S2010139217500112

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