We first document a large secular shift in the estimated response of the entire term structure of interest rates to inflation and output in the United States. The shift occurred in the early 1980s. We then derive an equation that links these responses to the coefficients of the central bank's monetary policy rule for the short-term interest rate. The equation reveals two countervailing forces that help explain and understand the nature of the link and how its sign is determined. Using this equation, we show that a shift in the policy rule in the early 1980s provides an explanation for the observed shift in the term structure. We also explore a shift in the policy rule in the 2002-2005 period and its possible effect on long-term rates.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13635.
Length: Date of creation: Nov 2007 Date of revision: Handle: RePEc:nbr:nberwo:13635
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Find related papers by JEL classification: E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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Andrew Ang & Sen Dong & Monika Piazzesi, 2005.
"No-arbitrage Taylor rules,"
Proceedings,
Federal Reserve Bank of San Francisco.
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Troy Davig & Eric M. Leeper, 2006.
"Generalizing the Taylor Principle,"
Caepr Working Papers
2006-001, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
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