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Term structure views of monetary policy

Author

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  • Sharon Kozicki
  • Peter A. Tinsley

Abstract

Term structure models and many descriptions of the transmission of monetary policy rest on the empirical relevance of the expectations hypothesis. Small differences in the perceived policy reaction function in VAR models of agent expectations strongly influence the relevance in the transmission mechanism of the expected short rate component of bond yields. Mean-reverting or difference-stationary characterizations of interest rates require large and volatile term premiums to match the observable term structure. However, short rate descriptions that capture shifting perceptions of long-horizon inflation evident in survey data support a more substantial term structure role for short rate expectations.

Suggested Citation

  • Sharon Kozicki & Peter A. Tinsley, 1998. "Term structure views of monetary policy," Research Working Paper 98-07, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:98-07
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    File URL: https://www.kansascityfed.org/documents/5279/pdf-rwp98-07.pdf
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    Citations

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    Cited by:

    1. Todd E. Clark & Troy Davig, 2008. "An empirical assessment of the relationships among inflation and short- and long-term expectations," Research Working Paper RWP 08-05, Federal Reserve Bank of Kansas City.
    2. Filippo COSSETTI & Francesco GUIDI, 2009. "ECB Monetary Policy and Term Structure of Interest Rates in the Euro Area: an Empirical Analysis," Working Papers 334, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    3. Kozicki, Sharon & Tinsley, P.A., 2008. "Term structure transmission of monetary policy," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 71-92, March.
    4. Peter A. Tinsley, 1998. "Short rate expectations, term premiums, and central bank use of derivatives to reduce policy uncertainty," Finance and Economics Discussion Series 1999-14, Board of Governors of the Federal Reserve System (U.S.).
    5. repec:ebl:ecbull:v:3:y:2008:i:3:p:1-15 is not listed on IDEAS

    More about this item

    Keywords

    Money; Interest rates;

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