Monetary policy and the term premium |
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| Institution: | 1. Aston Business School, Birmingham B4 7ET, UK;2. United Capital Partners Advisory, Moscow, Russia;1. China Nature Asset Management Co., Ltd., 159 West Fuxing Road, Shanghai, China;2. School of Economics, Xiamen University, 422 South Siming Road, Xiamen, China |
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| Abstract: | The term premium has become increasingly important in discussions of monetary policy formulation. This paper reviews two approaches to embedding a variable term premium into an otherwise standard modern DSGE model. The first approach maintains frictionless asset trade but alters preferences so that agents are more averse to the risk in long bonds. The second approach uses traditional preferences, but segments asset trade between long and short bonds. Policy issues are also discussed. |
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| Keywords: | Monetary policy Financial markets Term premium |
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