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The US Term Structure and Central Bank Policy

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  • Weber, Enzo

    ()

  • Wolters, Jürgen

    ()

Abstract

The expectations hypothesis of the term structure (EHT) implies cointegration between interest rates of different maturities and predicts certain values for adjustment speed. We estimate reduced-form vector error correction models of the US term structure. These are derived from a structural model combining the EHT, autocorrelated risk premia, interest rate smoothing and monetary policy feedback, which is able to capture a wide range of empirical outcomes. We explicitly test the necessary preconditions for the validity of the theoretical model. Premia persistence rises with longer-rate maturity, while the influence of the according spreads in the central bank reaction function diminishes.

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Bibliographic Info

Paper provided by University of Regensburg, Department of Economics in its series University of Regensburg Working Papers in Business, Economics and Management Information Systems with number 436.

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Date of creation: 01 Oct 2009
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Handle: RePEc:bay:rdwiwi:9655

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Keywords: Expectations Hypothesis; Risk Premium; Policy Reaction Function;

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Cited by:
  1. Soloschenko, Max & Weber, Enzo, 2014. "Capturing the Interaction of Trend, Cycle, Expectations and Risk Premia in the US Term Structure," University of Regensburg Working Papers in Business, Economics and Management Information Systems 475, University of Regensburg, Department of Economics.

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