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

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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....
View Full Document

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.

Page1 / 3

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online