Monetary Policy and the Term Structure of Interest Rates∗

@inproceedings{Ravenna2005MonetaryPA,
  title={Monetary Policy and the Term Structure of Interest Rates∗},
  author={Federico Ravenna and Juha Sepp{\"a}l{\"a}},
  year={2005}
}
  • Federico Ravenna, Juha Seppälä
  • Published 2005
We study how well a New Keynesian business cycle model can explain the observed behavior of nominal interest rates. We focus on two puzzles raised in previous literature. First, Donaldson, Johnsen, and Mehra (1990) show that while in the U.S. nominal term structure the interest rates are pro-cyclical and term spreads counter-cyclical the stochastic growth model predicts that the interest rates are counter-cyclical and term spreads pro-cyclical. Second, according to Backus, Gregory, and Zin… CONTINUE READING
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