Journal Article

Monetary Policy Shifts and the Term Structure

Andrew Ang, Jean Boivin, Sen Dong and Rudy Loo-Kung

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 78, issue 2, pages 429-457
Published in print April 2011 | ISSN: 0034-6527
Published online February 2011 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rdq006
Monetary Policy Shifts and the Term Structure

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  • Econometric and Statistical Methods and Methodology: General
  • Multiple or Simultaneous Equation Models; Multiple Variables
  • Monetary Policy, Central Banking, and the Supply of Money and Credit
  • Money and Interest Rates

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We estimate the effect of shifts in monetary policy using the term structure of interest rates. In our no-arbitrage model, the short rate follows a version of the Taylor's (1993, “Discretion Versus Policy Rules in Practice”, Carnegie-Rochester Conference Series on Public Policy, 39, 195–214) rule where the coefficients on the output gap and inflation vary over time. The monetary policy loading on the output gap has averaged around 0·4 and has not changed very much over time. The overall response of the yield curve to output gap components is relatively small. In contrast, the inflation loading has changed substantially over the last 50 years and ranges from close to zero in 2003 to a high of 2·4 in 1983. Long-term bonds are sensitive to inflation policy shifts with increases in inflation loadings leading to higher short rates and widening yield spreads.

Keywords: Monetary policy; Macro-finance models; Term structure; Policy shifts; C13; C32; E43; E44; E52

Journal Article.  12555 words.  Illustrated.

Subjects: Econometric and Statistical Methods and Methodology: General ; Multiple or Simultaneous Equation Models; Multiple Variables ; Monetary Policy, Central Banking, and the Supply of Money and Credit ; Money and Interest Rates

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