Bond Pricing and Business Cycles with Central Bank Asset Purchases

This paper studies the term premium in a general equilibrium model with a financial constraint and central bank asset purchases. Structural estimates of the term premium match past empirical measures. Term premium dynamics are policy dependent, with Federal Reserve quantitative easing programs reducing the term premium by 1.25% at peak and over 0.9% on average from 2009 to 2019. The model introduces household debt with a loan-in-advance constraint. Other models introduce household debt with relative impatience. The loan-in-advance specification nests the relative impatience setup. Endogenous debt rollover under the loan-in-advance specification dampens the estimated effect of asset purchases on GDP