So, the term premium – the excess return – is typically positive: it compensates investors for taking on such interest rate (or duration) risk. How does the interplay between the APP and our short-term interest rate policy enter this simple logic?
Suppose the level and shape of the yield curve prevailing at a given point in time is judged to be inconsistent with a set of financing conditions that are sufficiently accommodative to foster a return of inflation to levels below, but close to, 2% over the medium term.