Template-Type: ReDIF-Paper 1.0
Author-Name: Mitsuru Katagiri
Author-X-Name-First: Mitsuru 
Author-X-Name-Last: Katagiri
Author-Name: Koji Takahashi
Author-X-Name-First: Koji
Author-X-Name-Last: Takahashi
Title: Do term premiums matter? Transmission via exchange rate dynamics
Abstract: The macroeconomic effect of term premiums is a controversial issue both theoretically and quantitatively. In this paper, we explore the possibility that term premiums affect inflation and the real economy via exchange rate dynamics. For this purpose, we construct a small open economy model with limited asset market participation, focusing on the empirical observation that uncovered interest parity holds better for longer-term interest rate differentials. A quantitative exercise using Japanese and U.S. data shows that changes in term premiums, particularly those made by the central bank's bond purchases, have sizable effects on Japanese inflation rates via exchange rate dynamics.
Length: 59 pages
Creation-Date: 2021-10
File-URL: https://www.bis.org/publ/work971.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work971.htm
File-Format: text/html
Number: 971
Keywords: term premium, uncovered interest rate parity, quantitative easing
Classification-JEL: E31, E52, E58
Handle: RePEc:bis:biswps:971