We provide empirical evidence that the term structure of interest rates is an integral part of
the monetary transmission mechanism. Based on these findings, we amend the standard
monetary business cycle model to generate an endogenous term structure of interest rates
where movements in the term structure (and in term premia) have a direct effect on private
agents' spending decisions. The model features bond market segmentation through
adjustment costs for bond holdings and transaction costs between money and bonds. Our …