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The term premium in a small open economy: A micro-founded approach

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  • Ilek, Alex
  • Rozenshtrom, Irit

Abstract

We study the term premium on government bonds in a small open economy within a micro-founded DSGE model with Epstein–Zin preferences. A model with technological spillovers from the global economy to the small open economy succeeds in replicating the main macroeconomic and bond-pricing moments as well as international co-movement in accordance with the data. We identify two opposing effects of the openness of the economy on the nominal term premium, which in our model roughly offset each other, so that the term premia in the open and closed economies are similar, provided that both enjoy technological spillovers from abroad.

Suggested Citation

  • Ilek, Alex & Rozenshtrom, Irit, 2018. "The term premium in a small open economy: A micro-founded approach," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 333-352.
    • Handle: RePEc:eee:reveco:v:57:y:2018:i:c:p:333-352
    DOI: 10.1016/j.iref.2018.02.002
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    1. David Elkayam & Guy Segal, 2018. "Estimated Natural Rate of Interest in an Open Economy: The Case of Israel," Bank of Israel Working Papers 2018.05, Bank of Israel.
    2. Alba, Joseph D. & Liu, Jingting & Chia, Wai-Mun & Park, Donghyun, 2020. "Foreign output shock in small open economies: A welfare evaluation of monetary policy regimes," Economic Modelling, Elsevier, vol. 86(C), pages 101-116.

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    More about this item

    Keywords

    Term premium; Open economy; DSGE models; Technological spillovers; Epstein–Zin preferences;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

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