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How Do Monetary Policy Rules Affect Term Premia?

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  • Hibiki Ichiue

    (Bank of Japan)

Abstract

This paper derives analytical solutions for interest rate term structures in a new Keynesian framework. Theoretically, we consider the conditions for the positive average slope of nominal term structure, and show that the slope of a real one is positive. We then calibrate the model to find the following results. First, term premia represents compensation for risk of time-variation in IS shock rather than cost-push and monetary policy shocks. Second, a small slope of the Phillips curve is needed for a positive slope of the term structure. Third, the term structure of the inflation premium is downward on average. Finally, a less aggressive response to output gap in the monetary policy rule leads to lower term premia. The implication for the recent low long rate is also discussed.

Suggested Citation

  • Hibiki Ichiue, 2005. "How Do Monetary Policy Rules Affect Term Premia?," Bank of Japan Working Paper Series 05-E-14, Bank of Japan.
    • Handle: RePEc:boj:bojwps:05-e-14
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    File URL: http://www.boj.or.jp/en/research/wps_rev/wps_2005/data/wp05e14.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Term Structure of Interest Rate; Monetary Policy Rule; New Keynesian Model; Term Premium; Inflation Premium;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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