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Monetary Policy Shifts and the Term Structure

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  • Andrew Ang
  • Jean Boivin
  • Sen Dong
  • Rudy Loo-Kung

Abstract

We estimate the effect of shifts in monetary policy using the term structure of interest rates. In our no-arbitrage model, the short rate follows a version of the Taylor's (1993 , "Discretion Versus Policy Rules in Practice", Carnegie-Rochester Conference Series on Public Policy, 39, 195--214) rule where the coefficients on the output gap and inflation vary over time. The monetary policy loading on the output gap has averaged around 0·4 and has not changed very much over time. The overall response of the yield curve to output gap components is relatively small. In contrast, the inflation loading has changed substantially over the last 50 years and ranges from close to zero in 2003 to a high of 2·4 in 1983. Long-term bonds are sensitive to inflation policy shifts with increases in inflation loadings leading to higher short rates and widening yield spreads. Copyright 2011, Oxford University Press.

Suggested Citation

  • Andrew Ang & Jean Boivin & Sen Dong & Rudy Loo-Kung, 2011. "Monetary Policy Shifts and the Term Structure," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(2), pages 429-457.
    • Handle: RePEc:oup:restud:v:78:y:2011:i:2:p:429-457
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    File URL: http://hdl.handle.net/10.1093/restud/rdq006
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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G1 - Financial Economics - - General Financial Markets

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