Monetary Policy Shifts and the Term Structure
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
HEC Montreal; Columbia Business School; National Bureau of Economic Research (NBER)
Columbia Business School - Economics Department
Rudy J. Loo-Kung
Inter-American Development Bank (IADB)
NBER Working Paper No. w15270
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 (1993) 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.
Number of Pages in PDF File: 53
Date posted: August 25, 2009
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