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Macroeconomic linkages between monetary policy and the term structure of interest rates

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  • Howard Kung

    (University of British Columbia)

Abstract

This paper studies the equilibrium term structure of nominal and real interest rates and time-varying bond risk premia implied by a stochastic endogenous growth model with imperfect price adjustment. The production and price-setting decisions of firms drive low-frequency movements in growth and inflation rates that are negatively related. With recursive preferences, these growth and inflation dynamics are crucial for rationalizing key stylized facts in bond markets. When calibrated to macroeconomic data, the model quantitatively explains the means and volatilities of nominal bond yields and the failure of the expectations hypothesis.

Suggested Citation

  • Howard Kung, 2014. "Macroeconomic linkages between monetary policy and the term structure of interest rates," 2014 Meeting Papers 560, Society for Economic Dynamics.
  • Handle: RePEc:red:sed014:560
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    References listed on IDEAS

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    Cited by:

    1. Anthony Diercks, 2016. "The Equity Premium, Long-Run Risk, and Optimal Monetary Policy," 2016 Meeting Papers 207, Society for Economic Dynamics.
    2. Anthony M. Diercks, 2015. "The Equity Premium, Long-Run Risk, & Optimal Monetary Policy," Finance and Economics Discussion Series 2015-87, Board of Governors of the Federal Reserve System (U.S.).

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