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The Monetary Policy Decision-Making Process and the Term Structure of Interest Rates

Listed author(s):
  • Dillén, Hans


    (Monetary Policy Department, Central Bank of Sweden)

Registered author(s):

    This paper presents a theoretical model of the term structure of interest rates based on the monetary policy decision-making process at modern central banks. Evaluations of explicit expressions for the spot and forward rate curve render several important results: (i) Spot and forward rates are explicit functions of the number of policy meetings during the time to maturity rather than the time to maturity itself. Consequently, the forward rate curve is step-shaped. (ii) In addition, there are calendar time effects, i.e. the position within the policy cycle is also of importance, especially for short term interest rates. (iii) The forward rate curve exhibits hump-shaped responses to economic shocks and a modified version of the Nelson-Siegel model can be obtained as a special case.

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    Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 222.

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    Length: 35 pages
    Date of creation: 01 Apr 2008
    Handle: RePEc:hhs:rbnkwp:0222
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    Sveriges Riksbank, SE-103 37 Stockholm, Sweden

    Phone: 08 - 787 00 00
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