Macro1_PS3

# Macro1_PS3 - Macroeconomics 1 PSE Master APE.2010-2011 PS3 Prof Xavier Ragot T.A Eric Monnet 1 Yield Curve Answer the following questions using

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Unformatted text preview: Macroeconomics 1. PSE. Master APE.2010-2011. PS3 Prof. Xavier Ragot / T.A : Eric Monnet 1 Yield Curve Answer the following questions using your course and, if necessary, the article by John Campbell ( Some lessons form the yield curve , JEP, 1995). 1)What is the yield curve ? 2)why is it relevant for policy decisions ? 3)What is the main standard theory used to explain this curve ? and what are the main assumptions and limits of this theory ? 2 Monetary policy, regime changes and the term structures of interest rates Consider an economy 1 where money is neutral (keep in mind this assumption while interpretat- ing the results). Speci cally, assume that π t = Δ m t and that r (real interest rate) is constant at zero. Suppose the money supply is given by Δ m t = k Δ m t- 1 + t , where is a white noise disturbance. If you need some help for this exercise, you can use Mankiw and Miron 1986 paper. 1- Assume that the rational expectation theory of the term structure of interest rates holds (see Romer's chp 10) ; speci cally the two-period interest rate is given by R t = ( i t + E t i t +1 ) / 2 . i t denotes the nominal interest rate from t to t + 1 ; thus by the Fisher identity, it equals 2 r t + E t ( p t +1- p t ) i) what is i t as a function of Δ m t and k ? (assume that Δ m t is known at time t) ii) what is E t ( i t +1 ) as a function of Δ m t and k ? iii) what is the relation between R t and i t ; that is, what is R t as a function of i t and k ? Give an interpretation of this function....
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## This note was uploaded on 01/12/2011 for the course ECO 010023 taught by Professor Mrraggillpol during the Fall '09 term at Paris Tech.

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Macro1_PS3 - Macroeconomics 1 PSE Master APE.2010-2011 PS3 Prof Xavier Ragot T.A Eric Monnet 1 Yield Curve Answer the following questions using

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