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Term Structure Transmission of Monetary Policy

  • Sharon Kozicki
  • P.A. Tinsley

Under bond-rate transmission of monetary policy, the authors show that a generalized Taylor Principle applies, in which the average anticipated path of policy responses to inflation is subject to a lower bound of unity. This result helps explain how bond rates may exhibit stable responses to inflation, even in periods of passive policy. Another possible explanation is time-varying term premiums with risk pricing that depends on inflation. The authors present a no-arbitrage model of the term structure with horizon-dependent policy perceptions and time-varying term premiums to illustrate the mechanics and provide empirical results that support these transmission channels.

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Paper provided by Bank of Canada in its series Staff Working Papers with number 07-30.

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Length: 35 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:bca:bocawp:07-30
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