Operational targets and the yield curve: The euro area and Switzerland

When setting monetary policy, central banks seek to a ect the entire term structure of interest rates. Most central banks with a price stability or in ation mandate do this by targeting a very short-term market rate. This Letter presents a comparative analysis of the correlation between policy rate changes and bond yields in the euro area, where the implicit target of monetary policy is the overnight rate, and Switzerland, where the target is a three- month rate. The analysis indicates that unanticipated policy rate changes by the European Central Bank and Swiss National Bank are signi cantly and positively correlated with changes in German and Swiss government bond yields out to 6 years and 20 years, respectively.