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Monetary policy surprises and their transmission through term premia and expected interest rates

Author

Listed:
  • Iryna Kaminska

    (Bank of England)

  • Haroon Mumtaz
  • Roman Sustek

    (Queen Mary University of London)

Abstract

Monetary policy moves the yield curve. How much is due to expected interest rates vs.term premia? And does it matter for macroeconomic outcomes? Using an affine term structure model, we shed new light on these questions. Estimation is subject to restrictions addressing an estimation bias in expected interest rates obtained by previous studies. Highfrequency yield curve decomposition around FOMC announcements into term premia and expected interest rates then provides instruments for a local projection model. The effects of interest rate expectations and term premia are found equally important for the transmission mechanism and broadly consistent with macroeconomic theory.

Suggested Citation

  • Iryna Kaminska & Haroon Mumtaz & Roman Sustek, 2020. "Monetary policy surprises and their transmission through term premia and expected interest rates," Working Papers 917, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:917
    as

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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2020/wp917.pdf
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    References listed on IDEAS

    as
    1. Michael D. Bauer, 2018. "Restrictions on Risk Prices in Dynamic Term Structure Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 36(2), pages 196-211, April.
    2. Michael D. Bauer & Glenn D. Rudebusch & Jing Cynthia Wu, 2012. "Correcting Estimation Bias in Dynamic Term Structure Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(3), pages 454-467, April.
    3. Michele Piffer & Maximilian Podstawski, 2018. "Identifying Uncertainty Shocks Using the Price of Gold," Economic Journal, Royal Economic Society, vol. 128(616), pages 3266-3284, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    High-frequency data; monetary policy transmission mechanism; restricted affine term structure models; yield curve decomposition; local projection method; Bayesian estimation.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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