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Monetary Policy, Forward Rates and Long Rates: Does Germany Differ from the United States?


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  • Favero, Carlo A
  • Iacone, Fabrizio
  • Pifferi, Marco


In this paper we analyse the impact of monetary policy shocks on the term structure of interest rates in US and Germany. We estimate the term structure of spot rates and of the instantaneous forward rate following the methodology proposed by Svensson(1994). We interpret the instantaneous forward rate as the expectations for the overnight rate prevailing at each point in the future. Exploiting the fact that intervention on policy rates take place in occasion of regular meetings of the FOMC in the US and of the Bundesbank Council in Germany, we estimate the term structure of spot rates and of instantaneous forward rates the day before and the day after regular meetings. From the estimation of the term structures before meetings we derive a measure of expectations for Central Banks interventions. On this basis we can assess the predictability of monetary policy under the null of the validity of the pure expectational model. We perform this exercise both by regression analysis and by the implementation of a non-parametric test proposed by Pesaran and Timmermann(1990). We then proceed to derive a measure of policy shocks by using information on the effective intervention. Such measure of policy shocks is available both for dates in which some intervention was effectively implemented by Central Banks and for dates in which a policy of no intervention was decided. Finally, we evaluate the impact of monetary policy on the term structure of interest rates by regressing the change in the yield curve between the day before and the day after meetings on expected and unexpected modification in policy rates. We conduct such exercise for the US and Germany over the period 1991-1995 to evaluate the sign and the magnitude of the response of the term structures in the two countries to expected and unexpected modifications in monetary policy.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1456.

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Date of creation: Sep 1996
Date of revision:
Handle: RePEc:cpr:ceprdp:1456

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Keywords: Expectations; Institutional Forces; Monetary Policy;

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Cited by:
  1. Papadamou, Stephanos, 2013. "Market anticipation of monetary policy actions and interest rate transmission to US Treasury market rates," Economic Modelling, Elsevier, vol. 33(C), pages 545-551.
  2. Andersson, Malin & Dillén, Hans & Sellin, Peter, 2001. "Monetary Policy Signaling and Movements in the Swedish Term Structure of Interest Rates," Working Paper Series 132, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jan 2004.
  3. Gabriel Pérez Quirós & Jorge Sicilia, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Banco de Espa�a Working Papers 0229, Banco de Espa�a.
  4. Bagliano, Fabio C. & Favero, Carlo A., 1998. "Measuring monetary policy with VAR models: An evaluation," European Economic Review, Elsevier, vol. 42(6), pages 1069-1112, June.
  5. Andrew G Haldane & Vicky Read, 2000. "Monetary policy surprises and the yield curve," Bank of England working papers 106, Bank of England.
  6. Malin Andersson & Hans Dillén & Peter Sellin, 2002. "Monetary policy signalling and movements in the Swedish term structure of interest rates," BIS Papers chapters, in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 268-297 Bank for International Settlements.


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