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Publications
Publications
  • November 2023
  • Article
  • Quarterly Journal of Economics

A Quantity-Driven Theory of Term Premia and Exchange Rates

By: Robin Greenwood, Samuel G. Hanson, Jeremy C. Stein and Adi Sunderam
  • Format:Print
  • | Pages:63
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Abstract

We develop a model in which specialized bond investors must absorb shocks to the supply and demand for long-term bonds in two currencies. Since long-term bonds and foreign exchange are both exposed to unexpected movements in short-term interest rates, a shift in the supply of long-term bonds in one currency influences the foreign exchange rate between the two currencies, as well as bond term premia in both currencies. Our model matches several important empirical patterns, including the co-movement between exchange rates and term premia, as well as the finding that central banks' quantitative easing policies impact exchange rates. An extension of our model links spot exchange rates to the persistent deviations from covered interest rate parity that have emerged since 2008.

Keywords

Term Premium; Exchange Rate; Currency Exchange Rate; Bonds

Citation

Greenwood, Robin, Samuel G. Hanson, Jeremy C. Stein, and Adi Sunderam. "A Quantity-Driven Theory of Term Premia and Exchange Rates." Quarterly Journal of Economics 138, no. 4 (November 2023): 2327–2389.

Supplemental Information

Internet Appendix
Internet Appendix
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About The Authors

Robin Greenwood

Finance
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Samuel G. Hanson

Finance
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Adi Sunderam

Finance
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More from the Authors

    • 2024
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    Hidden Risk

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    • November 2024
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    Perceptions About Monetary Policy

    By: Michael D. Bauer, Carolin Pflueger and Adi Sunderam
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    • Annual Review of Financial Economics

    Supply and Demand and the Term Structure of Interest Rates

    By: Robin Greenwood, Samuel Hanson and Dimitri Vayanos
More from the Authors
  • Hidden Risk By: Daniel Barth, Phillip Monin, Emil Siriwardane and Adi Sunderam
  • Perceptions About Monetary Policy By: Michael D. Bauer, Carolin Pflueger and Adi Sunderam
  • Supply and Demand and the Term Structure of Interest Rates By: Robin Greenwood, Samuel Hanson and Dimitri Vayanos
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