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Optimal Term Structure in a Monetary Economy with Incomplete Markets

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  • Hoelle Matthew

    (Department of Economics, Purdue University, 403 W. State Street, West Lafayette, IN 47907, USA)

Abstract

In a stochastic economy, the rebalancing of short and long term government debt positions can have real effects when markets are incomplete. This paper analyzes both stationary and dynamic policy rules for the term structure of interest rates. After proving the existence of a recursive representation of equilibrium, necessary conditions for Pareto efficiency are characterized. The necessary conditions are equivalent for both stationary and dynamic policy rules.

Suggested Citation

  • Hoelle Matthew, 2018. "Optimal Term Structure in a Monetary Economy with Incomplete Markets," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 18(1), pages 1-26, January.
    • Handle: RePEc:bpj:bejtec:v:18:y:2018:i:1:p:26:n:18
    DOI: 10.1515/bejte-2016-0158
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    References listed on IDEAS

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    1. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June.
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    Cited by:

    1. Matthew Hoelle, 2018. "Stationary inflation and Pareto efficiency with incomplete markets and a large open economy," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(1), pages 115-128, April.

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    More about this item

    Keywords

    unconventional monetary policy; yield curve; asset span; incomplete markets; Pareto efficiency;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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