Liquidity, Term Spreads and Monetary Policy | Zendy

Aksoy Yunus | Zendy; Basso Henrique S. | Zendy

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Liquidity, Term Spreads and Monetary Policy

Author(s) -

Aksoy Yunus,

Basso Henrique S.

Publication year - 2014

Publication title -

the economic journal

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.683

H-Index - 160

eISSN - 1468-0297

pISSN - 0013-0133

DOI - 10.1111/ecoj.12087

Subject(s) - profitability index , portfolio , market liquidity , monetary policy , economics , monetary economics , maturity (psychological) , exploit , yield curve , investment (military) , yield (engineering) , term (time) , financial economics , finance , interest rate , physics , quantum mechanics , psychology , developmental psychology , materials science , computer security , politics , computer science , law , political science , metallurgy

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.

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