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Term Structure Transmission of Monetary Policy

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  • Sharon Kozicki
  • P.A. Tinsley

Abstract

Under bond-rate transmission of monetary policy, the authors show that a generalized Taylor Principle applies, in which the average anticipated path of policy responses to inflation is subject to a lower bound of unity. This result helps explain how bond rates may exhibit stable responses to inflation, even in periods of passive policy. Another possible explanation is time-varying term premiums with risk pricing that depends on inflation. The authors present a no-arbitrage model of the term structure with horizon-dependent policy perceptions and time-varying term premiums to illustrate the mechanics and provide empirical results that support these transmission channels.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 07-30.

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Length: 35 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:bca:bocawp:07-30

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Keywords: Interest rates; Transmission of monetary policy;

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References

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Citations

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Cited by:
  1. Erdemlioglu, Deniz, 2009. "Macro Factors in UK Excess Bond Returns: Principal Components and Factor-Model Approach," MPRA Paper 28895, University Library of Munich, Germany.
  2. Kozicki, Sharon & Tinsley, P.A., 2009. "Perhaps the 1970s FOMC did what it said it did," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 842-855, September.
  3. Sharon Kozicki & Peter Tinsley, 2005. "Term structure transmission of monetary policy," Research Working Paper RWP 05-06, Federal Reserve Bank of Kansas City.
  4. Sydney C. Ludvigson & Serena Ng, 2009. "A Factor Analysis of Bond Risk Premia," NBER Working Papers 15188, National Bureau of Economic Research, Inc.
  5. Petra Gerlach-Kristen & Barbara Rudolf, 2010. "Macroeconomic and interest rate volatility under alternative monetary operating procedures," Working Papers 2010-12, Swiss National Bank.

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