We derive a model in which a standard international capital asset pricing (ICAPM) model is nested within an ICAPM model with market imperfections. In the latter model an idiosyncratic stochastic factor affects the return of risky assets (over a risk-free rate) on top of the systematic component...

We present a simple macroeconomic model with open market operations that allows examining the effects of quantitative and credit easing. The central bank controls the policy rate, i.e. the price of money in open market operations, as well as the amount and the type of assets that are accepted as...

In this paper I examine various extensions of the Nelson and Siegel (1987) model with the purpose of fitting and forecasting the term structure of interest rates. As expected, I find that using more flexible models leads to a better in-sample fit of the term structure. However, I show that the...

We analyze optimal monetary policy in a sticky pricemodel where the central bank supplies money outrightvia asset purchases and lends money temporarily againstcollateral. The terms of central bank lending affect ra-tioning of money and impact on macroeconomic aggre-gates. The central bank can...

Most of the available monthly interest data series consist of monthlyaverages of daily observations. It is well-known that this averaging introduces spurious autocorrelation effectsin the first differences of the series. It isexactly this differenced series we are interested in when...

Champions of sustainable growth often call for more durable production technologies with less capital depreciation. As investment in more durable capital is encouraged by lower interest rates, we investigate whether policy makers can steer the economy towards a path with low interest rates in...

Variable rate savings accounts have two main features. The client rate is variable and deposits can be invested and withdrawn at any time. However, customer behaviour is not fully rational and actions are often performed with a delay. This paper focusses on measuring the interest rate risk of...

When the yield curve is modelled using an affine factor model, residuals may still contain relevant information and do not adhere to the familiar white noise assumption.This paper proposes a pragmatic way to improve out of sample performance for yield curve forecasting. The proposed adjustment...

This discussion paper led to a publication in the <I>International Journal of Forecasting</I> (2013). Vol. 29, pages 676-694.<P> We extend the class of dynamic factor yield curve models for the inclusion of macro-economic factors. We benefit from recent developments in the dynamic factor literature for...</p></i>

We develop a macroeconomic framework where money issupplied against only few eligible securities in open marketoperations. The relationship between the policy rate,expected inflation and consumption growth is affected bymoney market conditions, i.e. the varying liquidity value ofeligible assets...