The Macroeconomics of the Term Structure of Interest Rates

University dissertation from Stockholm : Department of Economics, Stockholm University

Abstract: This thesis consists of four papers, summarized as follows."The Term Structure of Interest Rates and the Monetary Transmission Mechanism"This paper provides empirical evidence that the term structure of interest rates is an integral part of the monetary transmission mechanism. We amend the standard New Keynesian model to generate an endogenous term structure where movements in the term structure have a direct effect on agents' spending decisions. The model features bond market segmentation through adjustment costs for bond holdings and transaction costs between money and bonds. The model is able to replicate the main stylized facts concerning the relation between output and the yield spread."Monetary Aggregates, Long-Term Interest Rates and the Monetary Transmission Mechanism in the Euro Area"We study the relation between money demand shocks and bond yields in the Euro area. We use Bayesian methods to estimate the general-equilibrium model of Marzo, Söderström and Zagaglia where bond prices are an integral part of the monetary transmission mechanism. Taking into account the impact of bond yields on the macroeconomy generates superior in-sample and out-of-sample forecasts for output, inflation and bond yields. The paper also shows that money velocity shocks matter for explaining the dynamics of long-term rates."Determinacy of Interest Rate Rules with Bond Transaction Services in a Cashless Economy"We consider a cashless New Keynesian model with two types of government bonds. One bond provides transaction services, whereas the other is used only as a store of value. Contrary to Canzoneri and Diba (2005), we show that the Taylor principle is still sacrosant. In general, the results of Leeper (1991) are confirmed."Money-market segmentation in the Euro area: What has changed during the turmoil?"This paper studies how the pattern of segmentation in the Euro area money market has been affected by the recent turmoil in financial markets. I use nonparametric estimates of realized volatility to test for volatility spillovers between rates at different maturities. Exogeneity tests from VAR models suggest that the transmission channel from longer maturities to the overnight disappears from August 9, 2007. Quantile measures of comovements report evidence of an increase in contagion within the longer end of the money market curve.

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