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Optimal Term Structure in a Monetary Economy with Incomplete Markets

Author

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  • Hoelle Matthew

    () (Department of Economics, Purdue University, 403 W. State Street, West Lafayette, IN 47907, USA)

Abstract

In a stochastic economy, the rebalancing of short and long term government debt positions can have real effects when markets are incomplete. This paper analyzes both stationary and dynamic policy rules for the term structure of interest rates. After proving the existence of a recursive representation of equilibrium, necessary conditions for Pareto efficiency are characterized. The necessary conditions are equivalent for both stationary and dynamic policy rules.

Suggested Citation

  • Hoelle Matthew, 2018. "Optimal Term Structure in a Monetary Economy with Incomplete Markets," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 18(1), pages 1-26, January.
  • Handle: RePEc:bpj:bejtec:v:18:y:2018:i:1:p:26:n:18
    as

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    References listed on IDEAS

    as
    1. George Kapetanios & Haroon Mumtaz & Ibrahim Stevens & Konstantinos Theodoridis, 2012. "Assessing the Economy‚Äźwide Effects of Quantitative Easing," Economic Journal, Royal Economic Society, vol. 122(564), pages 316-347, November.
    2. Hoelle, Matthew, 2015. "On the Pareto efficiency of term structure targeting policies," Mathematical Social Sciences, Elsevier, vol. 77(C), pages 62-69.
    3. Lucas Herrenbrueck, 2014. "Quantitative Easing and the Liquidity Channel of Monetary Policy," Discussion Papers dp14-09, Department of Economics, Simon Fraser University, revised Apr 2016.
    4. Matthew Hoelle, 2014. "Quantitative Easing under Incomplete Markets: Optimality Conditions for Stationary Policy," Purdue University Economics Working Papers 1277, Purdue University, Department of Economics.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    unconventional monetary policy; yield curve; asset span; incomplete markets; Pareto efficiency;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • 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

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