The impact of monetary policy on bond returns: A segmented markets approach
AbstractThis 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economics and Business.
Volume (Year): 60 (2008)
Issue (Month): 6 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jeconbus
Bond returns volatility Limited participation Segmented markets Monetary policy shocks;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Diebold, Francis X & Mariano, Roberto S, 2002.
"Comparing Predictive Accuracy,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 20(1), pages 134-44, January.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998.
"Monetary Policy Shocks: What Have We Learned and to What End?,"
NBER Working Papers
6400, National Bureau of Economic Research, Inc.
- Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
- Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
- Christopher A. Sims & Tao Zha, 1994.
"Error Bands for Impulse Responses,"
Cowles Foundation Discussion Papers
1085, Cowles Foundation for Research in Economics, Yale University.
- Fernando Alvarez & Robert E. Lucas, Jr. & Warren E. Weber, 2001.
"Interest rates and inflation,"
609, Federal Reserve Bank of Minneapolis.
- Singh, Rajesh & Lahiri, Amartya & Vegh, Carlos A, 2007.
"Segmented Asset Markets and Optimal Exchange Rate Regimes,"
Staff General Research Papers
11446, Iowa State University, Department of Economics.
- Lahiri, Amartya & Singh, Rajesh & Vegh, Carlos, 2007. "Segmented asset markets and optimal exchange rate regimes," Journal of International Economics, Elsevier, vol. 72(1), pages 1-21, May.
- Amartya Lahiri & Rajesh Singh & Carlos A. Vegh, 2007. "Segmented Asset Markets and Optimal Exchange Rate Regimes," NBER Working Papers 13154, National Bureau of Economic Research, Inc.
- John Landon-Lane & Filippo Occhino, 2004.
"A Likelihood-Based Evaluation of the Segmented Markets Friction in Equilibrium Monetary Models,"
Departmental Working Papers
200415, Rutgers University, Department of Economics.
- Filippo Occhino & John Landon-Lane, 2005. "A Likelihood-Based Evaluation of the Segmented Markets Friction in Equilibrium Monetary Models," 2005 Meeting Papers 116, Society for Economic Dynamics.
- Ravi Bansal & Amir Yaron, 2004.
"Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles,"
Journal of Finance,
American Finance Association, vol. 59(4), pages 1481-1509, 08.
- Ravi Bansal & Amir Yaron, 2000. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," NBER Working Papers 8059, National Bureau of Economic Research, Inc.
- Filippo Occhino, 2004. "Modeling the Response of Money and Interest Rates to Monetary Policy Shocks: A Segmented Markets Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 181-197, January.
- Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.