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Monetary Policy, the Bond Market, and Changes in FOMC Communication Policy

  • Troy Davig


    (Federal Reserve Bank of Kansas City)

  • Jeffrey R. Gerlach


    (Department of Economics, College of William and Mary)

Using high-frequency data in a Markov-switching framework, we identify states that imply different responses of the yield curve to unexpected changes in the federal funds target. Empirical estimates reveal a low-volatility state where long-term bonds respond significantly, and in a predictable manner, to unexpected changes in the federal funds target. An alternative state exists with higher volatility, where unexpected changes in the federal funds target raise the short-end of the yield curve, but have no significant effect on the long-end. The low-volatility state for long-term bonds occurs from September 1995 to May 1999 and again from March 2000 to January 2002. The timing of the switches between the two states for long-term bonds coincides with changes in FOMC communication policy - though not all changes in communications policy induce a switch.

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Paper provided by Department of Economics, College of William and Mary in its series Working Papers with number 31.

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Length: 24 pages
Date of creation: 11 Jul 2006
Date of revision:
Handle: RePEc:cwm:wpaper:31
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