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Cracking the Conundrum

  • David K. Backus
  • Jonathan H. Wright

From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25%, yet long-maturity yields and forward rates fell. We consider several possible explanations for this "conundrum." The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic and financial market volatility, more predictable monetary policy, and the state of the business cycle.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13419.

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Date of creation: Sep 2007
Date of revision:
Publication status: published as David K. Backus & Jonathan H. Wright, 2007. "Cracking the Conundrum," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(2007-1), pages 293-329.
Handle: RePEc:nbr:nberwo:13419
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