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What Does the Yield Curve Tell Us about the Federal Reserve’s Implicit Inflation Target?

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  • TAEYOUNG DOH

Abstract

This paper uses a dynamic stochastic general equilibrium (DSGE) model to explore additional information that can be extracted from the yield curve about the Federal Reserve’s implicit inflation target. In the model, monetary policy follows a nominal interest rate rule with a drifting inflation target, and agents have imperfect information about the persistent component of the inflation target. When the yield curve information is included, the DSGE model generates inflation expectations that are highly correlated with survey data evidence. In the DSGE model, agents quickly learn the inflation target and the gap between the perceived target and the actual target is quantitatively small. This is in contrast to some existing studies that suggest a persistent role of imperfect information even as long‐run inflation expectations have declined and stabilized at a low level since the mid 1980s.
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  • Taeyoung Doh, 2012. "What Does the Yield Curve Tell Us about the Federal Reserve‚Äôs Implicit Inflation Target?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 469-486, March.
  • Handle: RePEc:mcb:jmoncb:v:44:y:2012:i::p:469-486
    DOI: j.1538-4616.2011.00496.x
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    File URL: http://hdl.handle.net/10.1111/j.1538-4616.2011.00496.x
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    Cited by:

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    2. Ireland, Peter N., 2015. "Monetary policy, bond risk premia, and the economy," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 124-140.
    3. Kwangyong Park, 2020. "The Excess Sensitivity of Long-term Interest rates and Central Bank Credibility," Working Papers 2020-29, Economic Research Institute, Bank of Korea.
    4. Kwan Soo Bong & Taeyoung Doh & Woong Yong Park, 2014. "Yield curve and monetary policy expectations in small open economies," Research Working Paper RWP 14-13, Federal Reserve Bank of Kansas City.
    5. Amisano, Gianni & Tristani, Oreste, 2019. "Uncertainty shocks, monetary policy and long-term interest rates," Working Paper Series 2279, European Central Bank.
    6. De Graeve, Ferre & Emiris, Marina & Wouters, Raf, 2009. "A structural decomposition of the US yield curve," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 545-559, May.
    7. Daniel Burren, 2010. "The Term Structure of Interest Rates in a New Keynesian Model with Time-Varying Macro Volatility," Annals of Economics and Finance, Society for AEF, vol. 11(2), pages 277-299, November.

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