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A Quantity-Driven Theory of Term Premia and Exchange Rates

Author

Listed:
  • Robin Greenwood
  • Samuel Hanson
  • Jeremy C Stein
  • Adi Sunderam

Abstract

We develop a model in which specialized bond investors must absorb shocks to the supply and demand for long-term bonds in two currencies. Since long-term bonds and foreign exchange are both exposed to unexpected movements in short-term interest rates, a shift in the supply of long-term bonds in one currency influences the foreign exchange rate between the two currencies, as well as bond term premia in both currencies. Our model matches several important empirical patterns, including the comovement between exchange rates and term premia, and the finding that central banks’ quantitative easing policies affect exchange rates. An extension of our model links spot exchange rates to the persistent deviations from covered interest rate parity that have emerged since 2008.

Suggested Citation

  • Robin Greenwood & Samuel Hanson & Jeremy C Stein & Adi Sunderam, 2023. "A Quantity-Driven Theory of Term Premia and Exchange Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 138(4), pages 2327-2389.
    • Handle: RePEc:oup:qjecon:v:138:y:2023:i:4:p:2327-2389.
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    File URL: http://hdl.handle.net/10.1093/qje/qjad024
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    Cited by:

    1. Tobias J. Moskowitz & Chase P. Ross & Sharon Y. Ross & Kaushik Vasudevan, 2024. "Quantities and Covered-Interest Parity," Finance and Economics Discussion Series 2024-061, Board of Governors of the Federal Reserve System (U.S.).
    2. Robin Greenwood & Samuel Hanson & Dimitri Vayanos, 2024. "Supply and Demand and the Term Structure of Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 16(1), pages 115-151, November.
    3. Georgiadis, Georgios & Jarociński, Marek, 2025. "Global spillovers from multi-dimensional US monetary policy," Journal of International Economics, Elsevier, vol. 158(C).
    4. Ingomar Krohn & Andreas Uthemann & Rishi Vala & Jun Yang, 2025. "Demand-Driven Risk Premia in Foreign Exchange and Bond Markets," Staff Working Papers 25-29, Bank of Canada.
    5. 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.
    6. Marçal, Emerson Fernandes, 2024. "Testing rational expectations in a cointegrated VAR with structural change," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    7. Marco Graziano & Marius Koechlin & Andreas Tischbirek, 2026. "The Spillovers of LSAPs on Banks in the Euro Area," Finance and Economics Discussion Series 2026-005r1, Board of Governors of the Federal Reserve System (U.S.), revised 22 Jun 2026.
    8. Joseph Abadi, 2026. "Demand-Based Asset Pricing in General Equilibrium," Working Papers 26-12, Federal Reserve Bank of Philadelphia.
    9. Jesper Lindé & Marcin Kolasa & Stefan Laseen, 2025. "Unconventional Monetary Policies in Small Open Economies," IMF Working Papers 2025/066, International Monetary Fund.
    10. Nadav Ben Zeev & Noam Ben-Ze’ev & Daniel Nathan, 2025. "Capital Inflow Shocks and Convenience Yields," Working Papers 2503, Ben-Gurion University of the Negev, Department of Economics.
    11. Albagli, Elias & Ceballos, Luis & Claro, Sebastian & Romero, Damian, 2024. "UIP deviations: Insights from event studies," Journal of International Economics, Elsevier, vol. 148(C).
    12. Ikhlaas Gurrib & Firuz Kamalov & Osama Atayah & Dalia Hemdan & Olga Starkova, 2024. "Long-Run Trade Relationship between the U.S. and Canada: The Case of the Canadian Dollar with the U.S. Dollar," JRFM, MDPI, vol. 17(9), pages 1-21, September.
    13. Breckenfelder, Johannes & De Falco, Veronica, 2024. "Investor heterogeneity and large-scale asset purchases," Working Paper Series 2938, European Central Bank.
    14. Matteo Maggiori & Brent Neiman & Jesse Schreger, 2025. "Corporate Debt Structure with Home and International Currency Bias," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 73(2), pages 433-456, June.
    15. 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.
    16. Jiang, Zhengyang & Richmond, Robert J. & Zhang, Tony, 2025. "Understanding the strength of the dollar," Journal of Financial Economics, Elsevier, vol. 168(C).
    17. Balduin Bippus & Simon Lloyd & Daniel Ostry, 2023. "Granular banking flows and exchange-rate dynamics," Bank of England Staff Working Paper series 1043, Bank of England.
    18. Chadha, Jagjit S. & Macchiarelli, Corrado & Goel, Satyam & Hantzsche, Arno & Mellina, Sathya, 2026. "Deciphering Delphic guidance: The Bank of England and geopolitical uncertainty," Journal of International Money and Finance, Elsevier, vol. 162(C).
    19. Liu, Mengyue & Wei, Jiajia & Gao, Wang & Jiang, Yuanyuan & Sun, Yadong, 2025. "Multiscale dynamic linkages of China's financial markets under exchange rate shocks: An MJMD approach," International Review of Financial Analysis, Elsevier, vol. 108(PA).
    20. 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.

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