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Monetary Policy and the Information Content of the Yield Spread

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  • Feroli Michael

    ()
    (Federal Reserve Board)

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    Abstract

    This paper investigates the determinants of the ability of the yield spread to predict output fluctuations conditional on the short rate. In the model of the paper, this predictive power is contingent on the monetary authority's reaction function. In particular, expectations of monetary policy actions are crucial for the spread to predict output. Furthermore, numerical experiments suggest that the post-1979 decrease in the yield spread's predictive power is due to a shift in the monetary policy reaction function at that time.

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    File URL: http://www.degruyter.com/view/j/bejm.2004.4.1/bejm.2004.4.1.1156/bejm.2004.4.1.1156.xml?format=INT
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    Bibliographic Info

    Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

    Volume (Year): 4 (2004)
    Issue (Month): 1 (September)
    Pages: 1-17

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    Handle: RePEc:bpj:bejmac:v:topics.4:y:2004:i:1:n:13

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    Web page: http://www.degruyter.com

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    Web: http://www.degruyter.com/view/j/bejm

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    Cited by:
    1. Carlo Favero & Iryna Kaminska & Ulf Soderstrom, 2005. "The Predictive Power of the Yield Spread: Further Evidence and a Structural Interpretation," Working Papers 280, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    2. De Graeve, Ferre & Emiris, Marina & Wouters, Raf, 2009. "A structural decomposition of the US yield curve," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 545-559, May.
    3. Modena, Matteo, 2008. "The term structure and the expectations hypothesis: a threshold model," MPRA Paper 9611, University Library of Munich, Germany.
    4. Sagarika Mishra, . "Do Agents Learn by Least Squares? The Evidence Provided by Changes in Monetary Policy," Financial Econometics Series 2012_09, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
    5. Modena, Matteo, 2008. "Yield curve, time varying term premia, and business cycle fluctuations," MPRA Paper 8873, University Library of Munich, Germany.
    6. Hogrefe, Jens, 2007. "The yield spread and GDP growth - Time Varying Leading Properties and the Role of Monetary Policy," Economics Working Papers 2007,12, Christian-Albrechts-University of Kiel, Department of Economics.

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