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The B.E. Journal of Theoretical Economics

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Optimal Term Structure in a Monetary Economy with Incomplete Markets

Matthew Hoelle
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  • Department of Economics, Purdue University, 403 W. State Street, West Lafayette, IN 47907, USA
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Published Online: 2017-07-27 | DOI: https://doi.org/10.1515/bejte-2016-0158


In a stochastic economy, the rebalancing of short and long term government debt positions can have real effects when markets are incomplete. This paper analyzes both stationary and dynamic policy rules for the term structure of interest rates. After proving the existence of a recursive representation of equilibrium, necessary conditions for Pareto efficiency are characterized. The necessary conditions are equivalent for both stationary and dynamic policy rules.

Keywords: unconventional monetary policy; yield curve; asset span; incomplete markets; Pareto efficiency

JEL Classification: D52; E43; E44; E52


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About the article

Published Online: 2017-07-27

Citation Information: The B.E. Journal of Theoretical Economics, Volume 18, Issue 1, 20160158, ISSN (Online) 1935-1704, DOI: https://doi.org/10.1515/bejte-2016-0158.

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