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Monetary policy surprises and their transmission through term premia and expected interest rates

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  • Kaminska, Iryna
  • Mumtaz, Haroon
  • Šustek, Roman

Abstract

Monetary policy moves the yield curve. What is the economic interpretation of such moves and what are their macroeconomic consequences? Applying an affine term structure model to high-frequency yield curve movements around FOMC announcements, we shed new light on these questions. Estimation is subject to restrictions addressing estimation bias in previous studies. By imposing additional structure, expectations and term premia are decomposed into three components interpreted as monetary policy action, expected path and its uncertainty. In a local projections model, the shocks identified by the three components provide insights into monetary policy transmission in the context of existing theories.

Suggested Citation

  • Kaminska, Iryna & Mumtaz, Haroon & Šustek, Roman, 2021. "Monetary policy surprises and their transmission through term premia and expected interest rates," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 48-65.
    • Handle: RePEc:eee:moneco:v:124:y:2021:i:c:p:48-65
    DOI: 10.1016/j.jmoneco.2021.07.009
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    Cited by:

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    2. Andras Lengyel, 2022. "Treasury Supply Shocks and the Term Structure of Interest Rates in the UK," MNB Working Papers 2022/6, Magyar Nemzeti Bank (Central Bank of Hungary).
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    4. Kaminska, Iryna & Mumtaz, Haroon, 2022. "Monetary policy transmission during QE times: role of expectations and term premia channels," Bank of England working papers 978, Bank of England, revised 31 Aug 2022.
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    6. Adra, Samer & Menassa, Elie, 2022. "The Fed’s dual shocks and the housing market," Economics Letters, Elsevier, vol. 218(C).
    7. De Santis, Roberto A. & Zimic, Srečko, 2022. "Interest rates and foreign spillovers," European Economic Review, Elsevier, vol. 144(C).

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    More about this item

    Keywords

    High-frequency data; Affine term structure model; Estimation bias; Multidimensional policy shocks; Monetary policy transmission;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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