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Time-Varying Yield Curve Dynamics and Monetary Policy

  • Mumtaz, Haroon

    ()

    (Monetary Assessment and Strategy, Bank of England)

  • Surico, Paolo

    ()

    (Monetary Policy Committee Unit, Bank of England)

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.

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Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 23.

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Length: 34 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:mpc:wpaper:0023
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  20. Haroon Mumtaz & Paolo Surico, 2008. "Evolving international inflation dynamics: evidence from a time-varying dynamic factor model," Bank of England working papers 341, Bank of England.
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  24. Timothy Cogley, 2005. "Changing Beliefs and the Term Structure of Interest Rates: Cross-Equation Restrictions with Drifting Parameters," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 420-451, April.
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