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Macroeconomic linkages between monetary policy and the term structure of interest rates

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  • Kung, Howard

Abstract

This paper studies the equilibrium term structure of nominal and real interest rates and the time-varying bond risk premia implied by a stochastic endogenous growth model with imperfect price adjustment and monetary policy shocks. The production and price-setting decisions of firms drive low-frequency movements in growth and inflation rates that are negatively related. With recursive preferences, these growth and inflation dynamics are crucial for rationalizing key stylized facts in bond markets. When calibrated to macroeconomic data, the model quantitatively explains the means and volatilities of nominal bond yields and the failure of the expectations hypothesis.

Suggested Citation

  • Kung, Howard, 2015. "Macroeconomic linkages between monetary policy and the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 115(1), pages 42-57.
  • Handle: RePEc:eee:jfinec:v:115:y:2015:i:1:p:42-57
    DOI: 10.1016/j.jfineco.2014.09.006
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    Cited by:

    1. repec:eee:moneco:v:101:y:2019:i:c:p:47-63 is not listed on IDEAS
    2. Howard Kung & Gonzalo Morales & Alexandre Corhay, 2017. "Fiscal Discount Rates and Debt Maturity," 2017 Meeting Papers 840, Society for Economic Dynamics.
    3. Lorenzo Bretscher & Alex Hsu & Andrea Tamoni, 2017. "Level and Volatility Shocks to Fiscal Policy: Term Structure Implications," 2017 Meeting Papers 258, Society for Economic Dynamics.
    4. Mohsan Bilal, 2017. "Zeroing in: Asset Pricing at the Zero Lower Bound," 2017 Meeting Papers 377, Society for Economic Dynamics.
    5. Croce, Mariano Massimiliano & Nguyen, Thien & Raymond, Steve, 2019. "Persistent Government Debt and Aggregate Risk Distribution," CEPR Discussion Papers 13922, C.E.P.R. Discussion Papers.
    6. Francesco Bianchi & Howard Kung & Mikhail Tirskikh, 2019. "The Origins and Effects of Macroeconomic Uncertainty," 2019 Meeting Papers 245, Society for Economic Dynamics.
    7. Thien Nguyen, 2019. "Public Debt and the Slope of the Term Structure," 2019 Meeting Papers 957, Society for Economic Dynamics.
    8. Bianchi, Francesco & Kung, Howard & Tirskikh, Mikhail, 2019. "The Origins and Effects of Macroeconomic Uncertainty," CEPR Discussion Papers 13450, C.E.P.R. Discussion Papers.
    9. repec:eee:asieco:v:53:y:2017:i:c:p:56-66 is not listed on IDEAS
    10. Koijen, Ralph S.J. & Lustig, Hanno & Van Nieuwerburgh, Stijn, 2017. "The cross-section and time series of stock and bond returns," Journal of Monetary Economics, Elsevier, vol. 88(C), pages 50-69.
    11. Michael Donadelli & Patrick Grüning & Aurelija Proskute, 2019. "Monetary policy, trade, and endogenous growth under different international financial market structures," Bank of Lithuania Working Paper Series 57, Bank of Lithuania.
    12. repec:eee:ecofin:v:48:y:2019:i:c:p:730-745 is not listed on IDEAS
    13. repec:eee:jfinec:v:126:y:2017:i:3:p:447-470 is not listed on IDEAS
    14. Anthony M. Diercks & William Waller, 2017. "Taxes and the Fed : Theory and Evidence from Equities," Finance and Economics Discussion Series 2017-104, Board of Governors of the Federal Reserve System (US).
    15. Doh, Taeyoung & Wu, Shu, 2016. "The Equilibrium Term Structure of Equity and Interest Rates," Research Working Paper RWP 16-11, Federal Reserve Bank of Kansas City.
    16. Martin M. Andreasen, 2019. "Explaining Bond Return Predictability in an Estimated New Keynesian Model," CREATES Research Papers 2019-11, Department of Economics and Business Economics, Aarhus University.
    17. Lopez, Pier & Lopez-Salido, J. David & Vazquez-Grande, Francisco, 2015. "Nominal Rigidities and the Term Structures of Equity and Bond Returns," Finance and Economics Discussion Series 2015-64, Board of Governors of the Federal Reserve System (US).

    More about this item

    Keywords

    Term structure of interest rates; Asset pricing; Recursive preferences; Monetary policy; Endogenous growth; Inflation; Productivity;

    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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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