Dynamics of the term structure of UK interest rates
AbstractThis paper models the evolution of monetary policy, the term structure of interest rates and the UK economy across policy regimes. We model the interaction between the macroeconomy and the term structure using a time-varying VAR model augmented with the factors from the yield curve. Our results suggest that the level, slope and curvature factors display substantial time variation, with the level factor moving closely with measures of inflation expectations. Our estimates indicate a large decline in the volatility of both yield curve and macroeconomic variables around 1992, when the United Kingdom first adopted an inflation-targeting regime. During the inflation-targeting regime, monetary policy shocks have been more muted and inflation expectations have been lower than in the pre-1992 era. The link between the macroeconomy and the yield curve has also changed over time, with fluctuations in the level factor becoming less important for inflation after the Bank of England independence in 1997. Policy rates appear to have responded more systematically to inflation and unemployment in the current regime. We use our time-varying macro-finance model to revisit the evidence on the expectations hypothesis.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of England in its series Bank of England working papers with number 363.
Length: 36 pages
Date of creation: 20 Mar 2009
Date of revision:
Contact details of provider:
Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
Term structure; time-varying VAR; Bayesian estimation;
Other versions of this item:
- Francesco Bianchi & Haroon Mumtaz, 2010. "Dynamics of the Term Structure of UK Interest Rates," Working Papers 10-38, Duke University, Department of Economics.
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-28 (All new papers)
- NEP-CBA-2009-03-28 (Central Banking)
- NEP-FMK-2009-03-28 (Financial Markets)
- NEP-MAC-2009-03-28 (Macroeconomics)
- NEP-MON-2009-03-28 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Luca Benati and Paolo Surico, 2007. "Vector Autoregression Analysis and the Great Moderation," Discussion Papers 18, Monetary Policy Committee Unit, Bank of England.
- Andrea Carriero & Carlo Favero & Iryna Kaminska, 2004.
"Financial Factors, Macroeconomic Information and the Expectations Theory of the Term Structure of Interest Rates,"
253, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Carriero, Andrea & Favero, Carlo A. & Kaminska, Iryna, 2006. "Financial factors, macroeconomic information and the Expectations Theory of the term structure of interest rates," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 339-358.
- Carriero, Andrea & Favero, Carlo A & Kaminska, Iryna, 2004. "Financial Factors, Macroeconomic Information and the Expectations Theory of the Term Structure of Interest Rates," CEPR Discussion Papers 4301, C.E.P.R. Discussion Papers.
- Iryna Kaminska & Andrea Carriero & Carlo A. Favero, 2004. "Financial Factors, Macroeconomic Information and the Expectations Theory of the Term Structure of Interest Rates," Computing in Economics and Finance 2004 76, Society for Computational Economics.
- Efrem Castelnuovo & Paolo Surico, 2006.
"The Price Puzzle: Fact or Artifact?,"
"Marco Fanno" Working Papers
0016, Dipartimento di Scienze Economiche "Marco Fanno".
- Joyce, Michael & Kaminska, Iryna & Lildholdt, Peter, 2008. "Understanding the real rate conundrum: an application of no-arbitrage finance models to the UK real yield curve," Bank of England working papers 358, Bank of England.
- Luís Aguiar-Conraria & Manuel M. F. Martins & Maria Joana Soares, 2010.
"The yield curve and the macro-economy across time and frequencies,"
CEF.UP Working Papers
1004, Universidade do Porto, Faculdade de Economia do Porto.
- Aguiar-Conraria, Luís & Martins, Manuel M.F. & Soares, Maria Joana, 2012. "The yield curve and the macro-economy across time and frequencies," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1950-1970.
- Luís Francisco Aguiar & Manuel M. F. Martins & Maria Joana Soares, 2010. "The yield curve and the macro-economy across time and frequencies," NIPE Working Papers 21/2010, NIPE - Universidade do Minho.
- Ferman, Marcelo, 2011.
"Switching Monetary Policy Regimes and the Nominal Term Structure,"
Dynare Working Papers
- Marcelo Ferman, 2011. "Switching Monetary Policy Regimes and the Nominal Term Structure," FMG Discussion Papers dp678, Financial Markets Group.
- Vito Polito & Peter Spencer, .
"UK Macroeconomic Volatility and the Welfare Costs of Inflation,"
11/21, Department of Economics, University of York.
- Polito, Vito & Spencer, Peter, 2011. "UK Macroeconomic Volatility and the Welfare Costs of Inflation," Cardiff Economics Working Papers E2011/23, Cardiff University, Cardiff Business School, Economics Section.
- Roman Horváth & Michal Franta & Marek Rusnák, 2012.
"Evaluating Changes in the Monetary Transmission Mechanism in the Czech Republic,"
Working Papers IES
2012/11, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2012.
- Michal Franta & Roman Horvath & Marek Rusnak, 2011. "Evaluating Changes in the Monetary Transmission Mechanism in the Czech Republic," Working Papers 2011/13, Czech National Bank, Research Department.
- Cem Çakmakli, 2012. "Bayesian Semiparametric Dynamic Nelson-Siegel Model," Working Paper Series 59_12, The Rimini Centre for Economic Analysis, revised Sep 2012.
- Michal Franta & Jan Libich & Petr Stehlik, 2012.
"Tracking Monetary-Fiscal Interactions Across Time and Space,"
2012/06, Czech National Bank, Research Department.
- Michal Franta & Jan Libich & Petr StehlÃk, 2012. "Tracking Monetary-Fiscal Interactions across Time and Space," CAMA Working Papers 2012-40, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- Mumtaz, Haroon & Zabczyk, Pawel & Ellis, Colin, 2011. "What lies beneath? A time-varying FAVAR model for the UK transmission mechanism," Working Paper Series 1320, European Central Bank.
- Liu, Philip & Mumtaz, Haroon & Theophilopoulou, Angeliki, 2011. "International transmission of shocks: a time-varying factor-augmented VAR approach to the open economy," Bank of England working papers 425, Bank of England.
- Felix Geiger, 2009. "International Interest-Rate Risk Premia in Affine Term Structure Models," Diskussionspapiere aus dem Institut fÃ¼r Volkswirtschaftslehre der UniversitÃ¤t Hohenheim 316/2009, Department of Economics, University of Hohenheim, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Publications Team).
If references are entirely missing, you can add them using this form.