We thank, without implicating, Wouter den Haan (the Editor), two anonymous referees, Ourania Dimakou, Federico Di Pace, Martin Ellison, Michael Howell, Giovanni Melina, Ivan Petrella, Ekaterina Pirozhkova, Ron P. Smith, Roman Sustek and Ernesto Villanueva, seminar participants at the Universities of Munich, Warwick and York, the Bank of England, Norges Bank and Banco de España, participants at a 2011 conference on macroeconomic policy at Bilgi Universitesi, Istanbul, the LAMES 2011 in Santiago, Chile, the RES 2012 in Cambridge, the SCE 2012 in Prague and the 2012 Macro-prudential conference in Loughborough for helpful comments. Finally, we thank Eric Sims for making the bootstrapping codes publicly available. The views expressed in this study are those of the authors and do not necessarily coincide with those of the Banco de España and the Eurosystem. Yunus Aksoy (firstname.lastname@example.org) and Henrique S. Basso are also affiliated with the Birkbeck Centre for Applied Macroeconomics (BCAM).
Liquidity, Term Spreads and Monetary Policy
Version of Record online: 14 MAR 2014
© 2013 Royal Economic Society
The Economic Journal
Volume 124, Issue 581, pages 1234–1278, December 2014
How to Cite
Aksoy, Y. and Basso, H. S. (2014), Liquidity, Term Spreads and Monetary Policy. The Economic Journal, 124: 1234–1278. doi: 10.1111/ecoj.12087
- Issue online: 9 DEC 2014
- Version of Record online: 14 MAR 2014
- Accepted manuscript online: 5 SEP 2013 04:22AM EST
- Manuscript Accepted: 24 JUL 2013
- Manuscript Received: 17 APR 2012
We propose a model with segmented markets that delivers endogenous variations in term spreads driven by banks' portfolio decisions while facing maturity risk. Future profitability influences the term premium that banks require to carry this risk. When expected profitability is relatively high (low) spreads are low (high). Spread fluctuations feed back into the macroeconomy through investment decisions. Econometric evidence corroborates this link between expected financial profitability and yield spreads. Finally, we analyse unconventional monetary policy by allowing banks to sell assets to the central bank. These interventions exploit a new channel of policy transmission through banks' portfolio choice affecting the yield curve.