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Cracking the Conundrum

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  • David K. Backus
  • Jonathan H. Wright

Abstract

From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25%, yet long-maturity yields and forward rates fell. We consider several possible explanations for this "conundrum." The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic and financial market volatility, more predictable monetary policy, and the state of the business cycle.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13419.

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Date of creation: Sep 2007
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Publication status: published as David K. Backus & Jonathan H. Wright, 2007. "Cracking the Conundrum," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(2007-1), pages 293-329.
Handle: RePEc:nbr:nberwo:13419

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  15. Randall S. Kroszner, 2006. "Why are yield curves so flat and long rates so low globally? a speech at the Bankers' Association for Finance and Trade, New York, New York, June 15, 2006," Speech, Board of Governors of the Federal Reserve System (U.S.) 219, Board of Governors of the Federal Reserve System (U.S.).
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