Optimal Term Structure in a Monetary Economy with Incomplete Markets.

Optimal Term Structure in a Monetary Economy with Incomplete Markets.

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.

Previously circulated under the title "Quantitative easing under incomplete markets: Optimality conditions for stationary policy."

Please cite as:
Hoelle, M. (2014): "Quantitative easing under incomplete markets: Optimality conditions for stationary policy," Krannert Working Paper Series, Paper No. 1277.

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