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Expectations, Bond Yields and Monetary Policy

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Author Info

  • Albert Lee Chun

    (Stanford University)

Abstract

Through explicitly incorporating analysts' forecasts as observable factors in a dynamic arbitrage- free model of the yield curve, this paper proposes a framework for studying the impact of shifts in market sentiment on interest rates of all maturities. An empirical examination reveals that survey expectations about in°ation, output growth and the anticipated path of monetary policy actions contain important information for explaining movements in bond yields. Although perceptions about in°ation are largely responsible for movements in long-term interest rates, an explicit slope factor is necessary to adequately capture the dynamics of the yield curve. Macroeconomic forecasts play an important role in explaining time-variation in the market prices of risk, with forecasted GDP growth playing a dominant role. The estimated coe±cients from a forward-looking monetary policy rule support the assertion that the central bank preemptively reacts to in°ationary expectations while suggesting patience in accommodating real output growth expectations. Models of this type may provide traders and policymakers with a new set of tools for formally assessing the reaction of bond yields to shifts in market expectations due to the arrival of news or central bank statements and announcements.

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File URL: http://128.118.178.162/eps/fin/papers/0512/0512006.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0512006.

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Length: 1 pages
Date of creation: 06 Dec 2005
Date of revision:
Handle: RePEc:wpa:wuwpfi:0512006

Note: Type of Document - pdf; pages: 1
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Web page: http://128.118.178.162

Related research

Keywords: term structure; interest rates; affine model; forward-looking policy rule; macro-finance; no-arbitrage; blue-chip forecasts; survey data;

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