Financial Intermediaries and the Yield Curve by Andres Schneider :: SSRN

I study the yield curve dynamics in a general equilibrium model with financial intermediaries facing financing constraints. When constraints bind, intermediaries reallocate their portfolio, causing deadweight losses in aggregate consumption, thus affecting savers' marginal utility. Because the yield curve is a forecast of marginal utility, intermediaries constraints show up, via general equilibrium forces, in longterm yields. I show that the mechanism connecting intermediaries constraints and long-term yields produces highly nonlinear interest rate dynamics and a positive real term premium in equilibrium. I extend the analysis to the nominal yield curve using a simple Taylor rule.