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The Long and the Short End of the Term Structure of Policy Rules

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  • Josephine M. Smith
  • John B. Taylor

Abstract

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13635.

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Date of creation: Nov 2007
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Publication status: published as @ARTICLE{Smith_thelong, author = {Josephine M. Smith and John B. Taylor}, title = {The Long and Short End of the Term Structure of Policy Rules}, journal = {Journal of Monetary Economics, October 2009}, year = {}, pages = {907--917} }
Handle: RePEc:nbr:nberwo:13635

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  1. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 232-237, May.
  2. Michael F. Gallmeyer & Burton Hollifield & Francisco J. Palomino & Stanley E. Zin, 2007. "Arbitrage-free bond pricing with dynamic macroeconomic models," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 305-326.
  3. Andrew Ang & Sen Dong & Monika Piazzesi, 2005. "No-arbitrage Taylor rules," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  4. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(4), pages 745-787, May.
  5. Fuhrer, Jeffrey C, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(4), pages 1183-1209, November.
  6. Troy Davig & Eric M. Leeper, 2006. "Generalizing the Taylor Principle," Caepr Working Papers, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington 2006-001, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  7. Geert Bekaert & Seonghoon Cho & Antonio Moreno, 2005. "New-Keynesian Macroeconomics and the Term Structure," NBER Working Papers 11340, National Bureau of Economic Research, Inc.
  8. Glenn D. Rudebusch & Tao Wu, 2007. "Accounting for a Shift in Term Structure Behavior with No-Arbitrage and Macro-Finance Models," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(2-3), pages 395-422, 03.
  9. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
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Cited by:
  1. Moretti, Laura, 2014. "Monetary policy, long real yields and the financial crisis," CFS Working Paper Series 457, Center for Financial Studies (CFS).
  2. Yash P. Mehra & Bansai Sawhney, 2010. "Inflation measure, Taylor rules, and the Greenspan-Bernanke years," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue 2Q, pages 123-151.
  3. Rudebusch, Glenn D. & Swanson, Eric T., 2008. "Examining the bond premium puzzle with a DSGE model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(Supplemen), pages S111-S126, October.
  4. Jakas, Vicente, 2011. "Theory and empirics of an affine term structure model applied to European data," MPRA Paper 36029, University Library of Munich, Germany.
  5. James D. Hamilton & Seth Pruitt & Scott Borger, 2011. "Estimating the Market-Perceived Monetary Policy Rule," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 3(3), pages 1-28, July.
  6. James D. Hamilton & Seth Pruitt & Scott C. Borger, 2009. "The market-perceived monetary policy rule," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 982, Board of Governors of the Federal Reserve System (U.S.).

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