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Time-Varying Yield Curve Dynamics and Monetary Policy

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  • Mumtaz, Haroon

    () (Monetary Assessment and Strategy, Bank of England)

  • Surico, Paolo

    () (Monetary Policy Committee Unit, Bank of England)

Abstract

The dynamics of the US economy are modelled using a time-varying structural vector autoregression that incorporates information from the yield curve. We find important changes in the dynamics of macroeconomic variables such as inflation and the federal funds rate. In addition our results suggest a change in the relationship between the yield curve and macroeconomic variables. The monetary policy shocks of the early 1980s explain a large portion of the persistence of inflation and the level of the yield curve. Shocks to the level of the yield curve account for the persistence of the federal funds rate. We use our time-varying model provides to revisit the evidence on the expectations hypothesis.

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Bibliographic Info

Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 23.

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Length: 34 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:mpc:wpaper:0023

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Keywords: Nelson-Siegel; time variation; inflation expectations; credibility building; evidence on expectations hypothesis;

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Cited by:
  1. Jouchi Nakajima, 2011. "Time-Varying Parameter VAR Model with Stochastic Volatility: An Overview of Methodology and Empirical Applications," IMES Discussion Paper Series 11-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
  2. Márcio Laurini & João Frois Caldeira, 2012. "Some Comments on a Macro-Finance Model with Stochastic Volatility," IBMEC RJ Economics Discussion Papers 2012-04, Economics Research Group, IBMEC Business School - Rio de Janeiro.

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