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The Monetary Policy Decision-Making Process and the Term Structure of Interest Rates

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Author Info
Dillén, Hans () (Monetary Policy Department, Central Bank of Sweden)
Abstract

This paper presents a theoretical model of the term structure of interest rates based on the monetary policy decision-making process at modern central banks. Evaluations of explicit expressions for the spot and forward rate curve render several important results: (i) Spot and forward rates are explicit functions of the number of policy meetings during the time to maturity rather than the time to maturity itself. Consequently, the forward rate curve is step-shaped. (ii) In addition, there are calendar time effects, i.e. the position within the policy cycle is also of importance, especially for short term interest rates. (iii) The forward rate curve exhibits hump-shaped responses to economic shocks and a modified version of the Nelson-Siegel model can be obtained as a special case.

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Publisher Info
Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 222.

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Length: 35 pages
Date of creation: 01 Apr 2008
Date of revision:
Handle: RePEc:hhs:rbnkwp:0222

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
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Related research
Keywords: The term structure of interest rates; interest rate stepping; policy gap; calendar time effects; hump-shaped responses;

Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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This page was last updated on 2009-11-30.

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