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Liquidity, term spreads and monetary policy

Aksoy, Yunus and Basso, H. (2014) Liquidity, term spreads and monetary policy. The Economic Journal 124 (581), pp. 1234-1278. ISSN 0013-0133.

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Abstract

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 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.

Metadata

Item Type: Article
School: Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School
Research Centres and Institutes: Applied Macroeconomics, Birkbeck Centre for
Depositing User: Yunus Aksoy
Date Deposited: 17 Sep 2013 10:01
Last Modified: 30 Jul 2025 03:21
URI: https://eprints.bbk.ac.uk/id/eprint/8152

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