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Time-Varying Yield Curve Dynamics and Monetary Policy

Author

Listed:
  • Haroon Mumtaz

    (Monetary Assessment and Strategy, Bank of England)

  • Paolo Surico

    (Monetary Policy Committee Unit, Bank of England)

Abstract

The dynamics of the US economy are modelled using a time-varying structural vector autoregression that incorporates information from the yield curve. We find important changes in the dynamics of macroeconomic variables such as inflation and the federal funds rate. In addition our results suggest a change in the relationship between the yield curve and macroeconomic variables. The monetary policy shocks of the early 1980s explain a large portion of the persistence of inflation and the level of the yield curve. Shocks to the level of the yield curve account for the persistence of the federal funds rate. We use our time-varying model provides to revisit the evidence on the expectations hypothesis.

Suggested Citation

  • Haroon Mumtaz & Paolo Surico, 2008. "Time-Varying Yield Curve Dynamics and Monetary Policy," Discussion Papers 23, Monetary Policy Committee Unit, Bank of England.
    • Handle: RePEc:mpc:wpaper:0023
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    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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