The Term Structure of Interest Rates and Monetary Policy Ph.D. Thesis by:

This dissertation aims to contribute to our understanding of the dynamics of interest rates, monetary policy and economic activity. It consists of three chapters. The first chapter develops a theoretical framework to analyze how changes in the credibility of monetary policy affect the dynamics of the term structure of interest rates. A robust empirical fact about U.S. nominal interest rates is that they exhibit time-varying risk premia. In the last 20 years, the dynamics of these premia has changed. This chapter provides a monetary-policy explanation for this change. Monetary policy in the United States has achieved greater credibility and, as a result, market participants require less compensation for holding financial assets exposed to inflation risk. This explanation is substantiated using a general equilibrium model with nominal rigidities and habit formation in preferences. Two monetary policy regimes are analyzed: discretion and commitment. The model implies that the inflation risk premia are always lower under commitment and, thus, expected excess returns on bonds are lower and may become negative. The real effects of monetary policy in the model have an important asset-pricing implication: if the elasticity of intertemporal substitution of consumption is lower (greater) tha