AN OPTIMIZING ANALYSIS OF THE EFFECTS OF WORLD INTEREST DISTURBANCES ON THE OPEN-ECONOMY TERM STRUCTURE OF INTEREST-RATES

This paper studies the effects of world interest rate disturbances on the real domestic term structure of interest rates. An intertemporal optimizing, representative agent framework with variable employment and endogenous terms of trade is developed. The economy faces an external borrowing constraint. The adjustment of the short- and long-term rates as well as the discount bond yield curve is distinguished, with the long rate and the yield curve derived recursively from the short. Both permanent and temporary world interest shocks are considered. A notable result is that the yield curve exhibits relative maxima and minima for temporary disturbances.