Cracking the Conundrum

Backus, David K.; Wright, Jonathan H.

doi:10.2139/ssrn.1034261

Cracking the Conundrum

FEDS Working Paper No. 2007-46

37 Pages Posted: 29 Nov 2007

See all articles by David K. Backus

David K. Backus

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Jonathan H. Wright

Johns Hopkins University - Department of Economics

There are 3 versions of this paper

Date Written: October 1, 2007

Abstract

From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25 percentage points, 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 uncertainty and financial market volatility, more predictable monetary policy, and the state of the business cycle.

Keywords: Yield curve, forward rates, volatility, term premium, affine models, monetary policy

JEL Classification: E43, E52, G12

Suggested Citation: Suggested Citation

Backus, David K. and Wright, Jonathan H., Cracking the Conundrum (October 1, 2007). FEDS Working Paper No. 2007-46. Available at SSRN: https://ssrn.com/abstract=1034261 or http://dx.doi.org/10.2139/ssrn.1034261