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Shock and awe? Bond yield responses to domestic monetary policy in a small-open economy

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  • Nitschka, Thomas
  • Ramelet, Marc-Antoine

Abstract

We use Switzerland as a case study to assess the channels through which the domestic monetary policy of a small-open economy affects benchmark interest rates. Monetary-policy shocks are identified via changes in expectations on announcement days. We show that the shocks have a persistent effect on long-term government bond yields because they influence expectations about future short-term rates (the so-called signaling channel). By contrast, monetary-policy shocks have little impact on the term premium component of the bond yields (portfolio rebalancing channel). The full effect of the monetary-policy shocks takes time to build up, but eventually transmits one-to-one to long-term yields, in turn conducting the transmission of monetary policy to the wider economy.

Suggested Citation

  • Nitschka, Thomas & Ramelet, Marc-Antoine, 2023. "Shock and awe? Bond yield responses to domestic monetary policy in a small-open economy," Economics Letters, Elsevier, vol. 231(C).
    • Handle: RePEc:eee:ecolet:v:231:y:2023:i:c:s0165176523003336
    DOI: 10.1016/j.econlet.2023.111308
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    References listed on IDEAS

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