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Monetary policy and the yield curve

  • Antulio N. Bomfim
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    This paper examines the empirical properties of a two-factor affine model of the term structure of interest rates, estimated with LIBOR and interest rate swap data from 1989 through 2001. Despite its relative simplicity, the model fits the interest rate data remarkably well, both across time and maturity, and identifies changes in the current and expected stance of monetary policy as primary movers of the yield curve.

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    File URL: http://www.federalreserve.gov/pubs/feds/2003/200315/200315abs.html
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    File URL: http://www.federalreserve.gov/pubs/feds/2003/200315/200315pap.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-15.

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    Date of creation: 2003
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    Handle: RePEc:fip:fedgfe:2003-15
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    Web page: http://www.federalreserve.gov/

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    1. Charles L. Evans & David A. Marshall, 1997. "Monetary policy and the term structure of nominal interest rates: evidence and theory," Working Paper Series, Macroeconomic Issues WP-97-10, Federal Reserve Bank of Chicago.
    2. Pierluigi Balduzzi & Sanjiv Das & Silverio Foresi, 1996. "The Central Tendency: A Second Factor in Bond Yields," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-12, New York University, Leonard N. Stern School of Business-.
    3. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
    4. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    5. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    6. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York.
    7. Babbs, Simon H. & Nowman, K. Ben, 1999. "Kalman Filtering of Generalized Vasicek Term Structure Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 115-130, March.
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