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A Preferred-Habitat Model of Term Premia, Exchange Rates, and Monetary Policy Spillovers

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  • Pierre-Olivier Gourinchas
  • Walker Ray
  • Dimitri Vayanos

Abstract

We develop a two-country model in which currency and bond markets are populated by different investor clienteles, and segmentation is partly overcome by arbitrageurs with limited capital. Risk premia in our model are time-varying, connected across markets, and consistent with the empirical violations of uncovered interest parity and expectations hypothesis. Through risk premia, large-scale bond purchases lower domestic and foreign bond yields and depreciate the currency, and short-rate cuts lower foreign yields, with smaller effects than bond purchases. Currency returns are disconnected from long-maturity bond returns, and yet the currency market is instrumental in transmitting bond demand shocks across countries.

Suggested Citation

  • Pierre-Olivier Gourinchas & Walker Ray & Dimitri Vayanos, 2025. "A Preferred-Habitat Model of Term Premia, Exchange Rates, and Monetary Policy Spillovers," American Economic Review, American Economic Association, vol. 115(11), pages 3788-3824, November.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:11:p:3788-3824
    DOI: 10.1257/aer.20220379
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    Cited by:

    1. Albagli, Elias & Ceballos, Luis & Claro, Sebastian & Romero, Damian, 2024. "UIP deviations: Insights from event studies," Journal of International Economics, Elsevier, vol. 148(C).
    2. James Costain & Galo Nuño & Carlos Thomas, 2025. "The Term Structure of Interest Rates in a Heterogeneous Monetary Union," Journal of Finance, American Finance Association, vol. 80(4), pages 2389-2434, August.
    3. Robin Greenwood & Samuel Hanson & Dimitri Vayanos, 2023. "Supply and Demand and the Term Structure of Interest Rates," NBER Working Papers 31879, National Bureau of Economic Research, Inc.
    4. Cañon, Carlos & Gerba, Eddie & Pambira, Alberto & Stoja, Evarist, 2023. "An unconventional FX tail risk story," LSE Research Online Documents on Economics 120052, London School of Economics and Political Science, LSE Library.
    5. Michael B. Devereux & Charles Engel & Steve Pak Yeung Wu, 2023. "Collateral Advantage: Exchange Rates, Capital Flows and Global Cycles," NBER Working Papers 31164, National Bureau of Economic Research, Inc.
    6. Fornaro, Luca & Grosse Steffen, Christoph, 2024. "Fragmented Monetary Unions," CEPR Discussion Papers 19171, C.E.P.R. Discussion Papers.
    7. Santiago Camara & Lawrence Christiano & Hüsnü Dalgıc, 2025. "The International Monetary Transmission Mechanism," NBER Macroeconomics Annual, University of Chicago Press, vol. 39(1), pages 65-140.
    8. Walker Ray & Michael Droste & Yuriy Gorodnichenko, 2024. "Unbundling Quantitative Easing: Taking a Cue from Treasury Auctions," Journal of Political Economy, University of Chicago Press, vol. 132(9), pages 3115-3172.
    9. Matias Moretti & Lorenzo Pandolfi & Sergio L. Schmukler & Germán Villegas Bauer & Tomás Williams, 2024. "Inelastic Demand Meets Optimal Supply of Risky Sovereign Bonds," CSEF Working Papers 713, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 13 Oct 2025.
    10. Malliaropulos, Dimitris & Migiakis, Petros, 2023. "A global monetary policy factor in sovereign bond yields," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 445-465.
    11. Sinem Hacioğlu-Hoke & Daniel Ostry & Hélène Rey & Adrien Rousset Planat & Vania Stavrakeva & Jenny Tang, 2024. "Topography of the FX derivatives market: a view from London," Bank of England working papers 1103, Bank of England.
    12. International Monetary Fund, 2022. "Denmark: Selected Issues," IMF Staff Country Reports 2022/170, International Monetary Fund.
    13. Ostry, D. A., 2023. "Tails of Foreign Exchange-at-Risk (FEaR)," Janeway Institute Working Papers 2311, Faculty of Economics, University of Cambridge.
    14. Jiang, Zhengyang & Richmond, Robert J. & Zhang, Tony, 2025. "Understanding the strength of the dollar," Journal of Financial Economics, Elsevier, vol. 168(C).
    15. Tsvetelina Nenova, 2025. "Global or Regional Safe Assets: Evidence from Bond Substitution Patterns," BIS Working Papers 1254, Bank for International Settlements.
    16. Carlos Cañon & Eddie Gerba & Alberto Pambira & Evarist Stoja, 2023. "An Unconventional FX Tail Risk Story," CESifo Working Paper Series 10629, CESifo.
    17. Oleg Itskhoki & Dmitry Mukhin, 2025. "Mussa Puzzle Redux," Econometrica, Econometric Society, vol. 93(1), pages 1-39, January.
    18. Jappelli, Ruggero & Pelizzon, Loriana & Subrahmanyam, Marti G., 2023. "Quantitative easing, the repo market, and the term structure of interest rates," SAFE Working Paper Series 395, Leibniz Institute for Financial Research SAFE.
    19. Nobuhiro Abe & Yuto Ishikuro & Koki Nakayama & Yutaro Takano, 2025. "Interest Rate Pass-through by U.S. Banks: Macro Implications of Bank Competition," Bank of Japan Working Paper Series 25-E-9, Bank of Japan.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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