Monetary Policy and the Term Structure of Interest Rates
We study how well a New Keynesian business cycle model can explain the observed behavior of nominal interest rates. We focus on two puzzles raised in previous literature. First, Donaldson, Johnsen, and Mehra (1990) show that while in the U.S. nominal term structure the interest rates are pro-cyclical and term spreads counter-cyclical the stochastic growth model predicts that the interest rates are counter-cyclical and term spreads pro-cyclical. Second, according to Backus, Gregory, and Zin (1989) the standard general equilibrium asset pricing model can account for neither the sign nor the magnitude of average risk premiums in forward prices. Hence, the standard model is unable to explain rejections of the expectations hypothesis. We show that a New Keynesian model with habit-persistent preferences and a monetary policy feedback rule produces pro-cyclical interest rates, counter-cyclical term spreads, and creates enough volatility in the risk premium to account for the rejections of expectations hypothesis. Moreover, unlike Buraschi and Jiltsov (2005), we identify the systematic monetary policy, not monetary policy shocks, as the key factor behind rejections of expectations hypothesis.
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- Antonio Moreno & Geert Bekaert & Seonghoon Cho, 2004.
"New-Keynesian Macroeconomics and the Term Structure,"
2004 Meeting Papers
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- Geert Bekaert & Seonghoon Cho & Antonio Moreno, 2010. "New Keynesian Macroeconomics and the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 33-62, 02.
- Bekaert, Geert & Cho, Seonghoon & Moreno Ibáñez, Antonio, 2006. "New-Keynesian Macroeconomics and the Term Structure," CEPR Discussion Papers 5956, C.E.P.R. Discussion Papers.
- Geert Bekaert & Seonghoon Cho & Antonio Moreno, 2005. "New-Keynesian Macroeconomics and the Term Structure," NBER Working Papers 11340, National Bureau of Economic Research, Inc.
- Seonghoon Cho & Antonio Moreno & Geert Bekaert, 2005. "New-Keynesian Macroeconomics and the Term Structure," Faculty Working Papers 04/05, School of Economics and Business Administration, University of Navarra.
- Peter J. Klenow & Oleksiy Kryvtsov, 2005.
"State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?,"
NBER Working Papers
11043, National Bureau of Economic Research, Inc.
- Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, MIT Press, vol. 123(3), pages 863-904, August.
- Oleksiy Kryvtsov & Peter J. Klenow, 2004. "State-Dependent or Time-Dependent Pricing: Does It Matter For Recent U.S. Inflation?," Computing in Economics and Finance 2004 277, Society for Computational Economics.
- Peter J. Klenow & Oleksiy Kryvtsov, 2005. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Working Papers 05-4, Bank of Canada.
- Peter J. Klenow & Oleksiy Kryvtsov, 2007. "State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?," Discussion Papers 07-007, Stanford Institute for Economic Policy Research.
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2003-30, Federal Reserve Bank of Atlanta.
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- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
- Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, June.
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