2017
DOI: 10.1257/mac.20150179
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Targeting Long Rates in a Model with Segmented Markets

Abstract: This paper develops a model of segmented financial markets in which the net worth of financial institutions limits the degree of arbitrage across the term structure. The model is embedded into the canonical Dynamic New Keynesian (DNK) framework. We estimate the model using data on the term premium. Our principal results include the following. First, the estimated segmentation coefficient implies a nontrivial effect of central bank asset purchases on yields and real activity. Second, there are welfare gains to … Show more

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Cited by 70 publications
(112 citation statements)
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“…Most studies examining the impact of unconventional policy measures to date have focused on the effects of large-scale asset purchases upon financial markets, typically, by looking at the risk or term premium component of bond yields and other prices (see, e.g., Gorodonichenko & Ray, 2018;Gagnon et al, 2011;Hamilton & Wu, 2012;Inoue & Rossi, 2019 for the US; Kimura & Small, 2006;Ueda, 2012 for Japan;and Rogers, Scotti, & Wright, 2014 for several major economies). 3 However, there are also a number of studies assessing the overall macroeconomic effects, such as the study by Chen, Curda, and Ferrero (2012) and Carlstrom, Fuerst, and Paustian (2017) employing a fully specified dynamic stochastic general equilibrium framework as well as those by Chung, Laforte, Reifschneider, and Williams (2012) and Engen, Laubach, and Reifschneider (2015) using traditional large-scale econometric models. However, an important shortcoming of these approaches is that they have to rely on economic models estimated for periods that include conventional monetary policy.…”
Section: Previous Literaturementioning
confidence: 99%
“…Most studies examining the impact of unconventional policy measures to date have focused on the effects of large-scale asset purchases upon financial markets, typically, by looking at the risk or term premium component of bond yields and other prices (see, e.g., Gorodonichenko & Ray, 2018;Gagnon et al, 2011;Hamilton & Wu, 2012;Inoue & Rossi, 2019 for the US; Kimura & Small, 2006;Ueda, 2012 for Japan;and Rogers, Scotti, & Wright, 2014 for several major economies). 3 However, there are also a number of studies assessing the overall macroeconomic effects, such as the study by Chen, Curda, and Ferrero (2012) and Carlstrom, Fuerst, and Paustian (2017) employing a fully specified dynamic stochastic general equilibrium framework as well as those by Chung, Laforte, Reifschneider, and Williams (2012) and Engen, Laubach, and Reifschneider (2015) using traditional large-scale econometric models. However, an important shortcoming of these approaches is that they have to rely on economic models estimated for periods that include conventional monetary policy.…”
Section: Previous Literaturementioning
confidence: 99%
“…However, analysis of the systematic effects of alternative strategies for QE, accounting for the ELB, has been limited. For example, Carlstrom et al (2017) and Quint and Rabanal (2017) present DSGE models in which quantitative easing is a powerful instrument for counteracting financial shocks, but abstract from the interaction of quantitative easing and the ELB. Reifschneider (2016) considers the effects of QE in an illustrative scenario using the FRB/US model, but does not consider how a QE strategy interacts with the setting of the shortterm interest rate under a wide variety of conditions or the relative merits of QE and other approaches, such as raising the inflation target or strategies with price-level, rather than inflation, elements.…”
mentioning
confidence: 99%
“…The models by Gertler and Karadi (2013) and Carlstrom et al (2017) assume financially constrained financial intermediaries, where QE eases the constraint on financing productive investment in the economy. In these models, productive capital is financed by financial intermediaries based on their net worth and the deposits made by households.…”
Section: Related Literaturementioning
confidence: 99%
“…ernment debt. The AR(2) specification follows Carlstrom et al (2017) and captures the expectation of a further expansion of the central bank balance sheet in the future; i.e., current bond purchases being followed by additional purchases in the future, as announced by the central bank at the start of the programme. As a sensitivity check, we also tested an AR(1) process for the QE shock in line with Chen et al (2012) and De Graeve and Theodoridis (2016).…”
Section: Model Solution and Econometric Approachmentioning
confidence: 99%