Advanced Search
MyIDEAS: Login to save this paper or follow this series

Monetary Policy and Yield Curve Dynamics in an Emerging Market: Sri Lankan Perspectives

Contents:

Author Info

Registered author(s):

    Abstract

    The monetary policy targets the very short end of the yield curve although real economic activity is largely dependent upon the medium to long- term market interest rates. Conventional wisdom is that decrease in the monetary policy target rate leads to an immediate decrease in market interest rates, and an increase in bond prices; yet evidence for this view is elusive. Therefore, the question of how do the monetary policy actions translate across the yield curve remain at the forefront of many recent policy debates. Bringing the foundations of Expectation Hypothesis (EH) and empirical analysis of Sri Lanka money market and government bond daily yield rates for the period 2000 to 2009 through the application of Ordinary Least Squares (OLS) and Vector Error Correction Model (VECM), explains that monetary policy impact monotonically decreases over the yield curve at the short-end and become segmented toward medium to long-term of the yield curve. The impact appears to be waning at a faster pace at times of financial and economic uncertainties compared against stable economic period. This invites policy attention on the part of monetary policy effectiveness, structural impediments and market confidence in Sri Lanka.

    Download Info

    If 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.
    File URL: http://www.iuj.ac.jp/workingpapers/index.cfm?File=EMS_2010_11.pdf
    File Function: First version, 2010
    Download Restriction: no

    Bibliographic Info

    Paper provided by Research Institute, International University of Japan in its series Working Papers with number EMS_2010_11.

    as in new window
    Length: 33 pages
    Date of creation: Aug 2010
    Date of revision:
    Handle: RePEc:iuj:wpaper:ems_2010_11

    Contact details of provider:
    Postal: 777 Kokusai-cho, Minami Uonuma0-shi, Niigata 949-7277 JAPAN
    Phone: 81+(0)25-779-1112
    Fax: 81+(0)25-779-1187
    Web page: http://www.iuj.ac.jp/research/
    More information through EDIRC

    Related research

    Keywords: Monetary policy; Expectation hypothesis; Segmented market hypothesis; Yield curve and term structure of interest rates;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    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.:
    as in new window
    1. Daniel L. Thornton, 1998. "Lifting the veil of secrecy from monetary policy: evidence from the Fed's early discount rate policy," Working Papers 1998-003, Federal Reserve Bank of St. Louis.
    2. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    3. Hsu, Chiente & Kugler, Peter, 1997. "The Revival of the Expectations Hypothesis of the US Term Structure of Interest Rates," Economics Letters, Elsevier, vol. 55(1), pages 115-120, August.
    4. Frederic S. Mishkin, 2009. "Is Monetary Policy Effective During Financial Crises?," NBER Working Papers 14678, National Bureau of Economic Research, Inc.
    5. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
    6. Balduzzi, Pierluigi, et al, 1998. "Interest Rate Targeting and the Dynamics of Short-Term Rates," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(1), pages 26-50, February.
    7. Obstfeld, Maurice, 2009. "Lenders of Last Resort in a Globalized World," CEPR Discussion Papers 7355, C.E.P.R. Discussion Papers.
    8. Mishkin, Frederic S, 1990. "The Information in the Longer Maturity Term Structure about Future Inflation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(3), pages 815-28, August.
    9. Thornton, Daniel-L, 2004. "Testing the Expectations Hypothesis: Some New Evidence for Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(2), pages 45-69, May.
    10. Smets, Frank & Tsatsaronis, Kostas, 1997. "Why Does the Yield Curve Predict Economic Activity? Dissecting the Evidence for Germany and the United States," CEPR Discussion Papers 1758, C.E.P.R. Discussion Papers.
    11. Bindseil, Ulrich, 2004. "Monetary Policy Implementation: Theory, past, and present," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199274543, October.
    12. Bates, Samuel & Vaugirard, Victor, 2009. "Monetary Transmission Channels around the Subprime Crisis : The US Experience," Economics Papers from University Paris Dauphine 123456789/1483, Paris Dauphine University.
    13. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
    14. Arturo Estrella & Frederic S. Mishkin, 1996. "The yield curve as a predictor of U.S. recessions," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 2(Jun).
    15. Jondeau, Eric & Ricart, Roland, 1999. "The expectations hypothesis of the term structure: tests on US, German, French, and UK Euro-rates," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 725-750, October.
    16. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
    17. Nobuyuki Oda & Kazuo Ueda, 2007. "The Effects Of The Bank Of Japan'S Zero Interest Rate Commitment And Quantitative Monetary Easing On The Yield Curve: A Macro-Finance Approach," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 58(3), pages 303-328.
    18. Maurice Obstfeld, 2009. "2009 International Conference "Financial System and Monetary Policy Implementation," Keynote Speech, Lenders of Last Resort in a Globalized World," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 27(1), pages 35-52, November.
    19. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April.
    20. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
    21. Nombulelo Duma, 2008. "Pass-Through of External Shocks to Inflation in Sri Lanka," IMF Working Papers 08/78, International Monetary Fund.
    22. Drakos, Konstantinos, 2001. "Monetary policy and the yield curve in an emerging market: the Greek case," Emerging Markets Review, Elsevier, vol. 2(3), pages 244-262, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:iuj:wpaper:ems_2010_11. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kazumi Imai, Office of Academic Affairs).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.