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Term Premium Dynamics and the Taylor Rule

Author

Listed:
  • Michael Gallmeyer

    (McIntire School of Commerce, University of Virginia, Charlottesville, VA 22904, USA)

  • Burton Hollifield

    (Tepper School of Business, Carnegie Mellon University, Pittsburgh, PA 15213, USA)

  • Francisco Palomino

    (Board of Governors of the Federal Reserve System, Washington, DC 20036, USA)

  • Stanley Zin

    (Stern School of Business, New York University, New York, NY 10012, USA5National Bureau of Economic Research, USA)

Abstract

We explore the bond-pricing implications of an exchange economy where preference shocks result in time-varying term premiums in real yields with a Taylor rule determining inflation dynamics and nominal term premiums. We calibrate the model by matching the term structure of the means and volatilities of nominal yields. Unlike a model with exogenous inflation, a Taylor rule matching empirical properties of inflation leads to nominal term premiums that are volatile at long maturities. Increasing monetary policy aggressiveness decreases the level and volatility of nominal yields.

Suggested Citation

  • Michael Gallmeyer & Burton Hollifield & Francisco Palomino & Stanley Zin, 2017. "Term Premium Dynamics and the Taylor Rule," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 7(04), pages 1-39, December.
    • Handle: RePEc:wsi:qjfxxx:v:07:y:2017:i:04:n:s2010139217500112
    DOI: 10.1142/S2010139217500112
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    Cited by:

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    3. Croce, M. & Nguyen, Thien T. & Raymond, S., 2021. "Persistent government debt and aggregate risk distribution," Journal of Financial Economics, Elsevier, vol. 140(2), pages 347-367.
    4. Palazzo, Berardino & Yamarthy, Ram, 2022. "Credit risk and the transmission of interest rate shocks," Journal of Monetary Economics, Elsevier, vol. 130(C), pages 120-136.
    5. Mariano Max Croce & Thien T. Nguyen & Steve Raymond, 2019. "Persistent Government Debt and Aggregate Risk Distribution," NBER Working Papers 26177, National Bureau of Economic Research, Inc.

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