IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/18736.html
   My bibliography  Save this paper

The Term Structure of Interest Rates in a Heterogeneous Monetary Union

Author

Listed:
  • Costain, James
  • Nuño, Galo
  • Thomas, Carlos

Abstract

We build an arbitrage-based model of the yield curves in a heterogeneous monetary union with sovereign default risk, which can account for the asymmetric shifts in euro area yields during the Covid-19 pandemic. We derive an affine term structure solution and decompose yields into term premium and credit risk components. In an extension, we endogenize the peripheral default probability, showing that it decreases with central bank bond holdings. Calibrating the model to Germany and Italy, we show that a 'default risk extraction' channel is the main driver of Italian yields and that flexibility makes asset purchases more effective.

Suggested Citation

  • Costain, James & Nuño, Galo & Thomas, Carlos, 2024. "The Term Structure of Interest Rates in a Heterogeneous Monetary Union," CEPR Discussion Papers 18736, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18736
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP18736
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Affine model; Quantitative easing; Ecb;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:18736. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.