A Unified Theory of the Term-Structure and Monetary Stabilization
We develop a New-Keynesian framework that incorporates the term-structure of financial markets and emphasizes the active role of the government and central bank’s balance sheet size and composition. We demonstrate that the financial market segmentation and the household’s endogenous portfolio reallocation are crucial features for accurately understanding the effects of Large-Scale Asset Purchase (LSAP) programs. Our micro-foundation based on imperfect information about expected discounted asset returns readily accommodates varying degrees of market segmentation across asset classes and maturities, based on estimatable asset demand elasticities. The central bank’s bond purchases across maturities serve as a major determinant of the level and slope of the term-structure, and yield-curve-control (YCC) policies that actively manipulate long-term yields are highly effective in terms of stabilization during both normal times and at the ZLB. However, YCC policies also increase the durations of ZLB episodes, consequently placing the central bank in a position where the short-term rate becomes a less useful policy tool.
Date: 31 October 2023, 13:15 (Tuesday, 4th week, Michaelmas 2023)
Venue: Manor Road Building, Manor Road OX1 3UQ
Venue Details: Seminar Room A or https://zoom.us/j/99960790792?pwd=L01NVnBQcGlqMVdQMHBiWDN3YmFMZz09
Speaker: Seung Lee (Saïd Business School)
Organising department: Department of Economics
Part of: Seminar in Macroeconomics
Booking required?: Not required
Audience: Members of the University only
Editor: Shreyasi Banerjee