Another look at yield spreads: Monetary policy and the term structure of interest rates

Dong Heon Kim ()

No 98-3, Research Notes from Deutsche Bank Research

Abstract: Liquidity plays an important role in explaining how banks determine their allocation of funds. This paper analyses whether this fact can explain the term structure of interest rates and yield spreads. The paper models banks' demand for liquidity in a manner similar to that used to study household need for liquidity, namely, by using a cash-in-advance type model. The paper finds that the shadow price of the cash-in-advance constraint plays an important role in determining yield spreads. The model predicts that short-term rates respond more to monetary policy than long-term rates, consistent with earlier empirical findings. The empirical part of the paper shows that the expectations hypothesis might be salvaged under the maintained hypothesis concerning the liquidity premium and default risk premium. This paper confirms the finding that monetary contractions raise nominal interest rates.

Keywords: Term structure of interest rates; Expectations hypothesis; Yield Spreads; Liquidity; Cash-in-advance constraint; Monetary policy (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
Date: 1998
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/40291/1/258388803.pdf (application/pdf)

Related works:
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:zbw:dbrrns:983

Access Statistics for this paper

More papers in Research Notes from Deutsche Bank Research Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().