We develop a segmented markets model which rationalizes the effects of monetary policy on the term structure of interest rates. When arbitrageurs’ portfolio features positive duration, an unexpected rise in the short rate lowers their wealth and raises term premia. A calibration to the U.S. economy accounts for the transmission of monetary shocks to long rates. We discuss the additional implications of our framework for state-dependence in policy transmission, the volatility and slope of the yield curve, and trends in term premia accompanying trends in the natural rate.
Authors
- Acknowledgements & Disclosure
- An early version of this paper circulated under the title “Heterogeneity, Monetary Policy, and the Term Premium”. We thank Michael Bauer, Luigi Bocola, Anna Cieslak, James Costain, Vadim Elenev, Pierre-Olivier Gourinchas, Robin Greenwood, Sam Hanson, Ben Hebert, Christian Heyerdahl-Larsen, Sydney Ludvigson, Hanno Lustig, Anil Kashyap, Arvind Krishnamurthy, Matteo Maggiori, Stavros Panageas, Carolin Pflueger, Monika Piazzesi, Walker Ray, Alp Simsek, Eric Swanson, Dimitri Vayanos, Olivier Wang, Wei Xiong, and Motohiro Yogo for discussions. We thank Manav Chaudhary, Lipeng (Robin) Li, and Jihong Song for excellent research assistance. This research has been supported by the National Science Foundation grant SES-2117764. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w32324
- Published in
- United States of America
