Monetary Policy, Segmentation, and the Term Structure

We develop a segmented markets model which rationalizes the effects of monetary policy on the term structure of interest rates.When arbitrageurs' portfolio features positive duration, an unexpected rise in the short rate lowers their wealth and raises term premia.A calibration to the U.S. economy accounts for the transmission of monetary shocks to long rates.We discuss the additional implications of our framework for state-dependence in policy transmission, the volatility and slope of the yield curve, and trends in term premia accompanying trends in the natural rate.