Cracking the Conundrum

35 Pages Posted: 13 Oct 2008

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

Multiple version iconThere are 3 versions of this paper

Date Written: May 2007


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 explanationsfor 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.

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

Suggested Citation

Backus, David K. and Wright, Jonathan H., Cracking the Conundrum (May 2007). NYU Working Paper No. 2451/26052, Available at SSRN:

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Jonathan H. Wright

Johns Hopkins University - Department of Economics ( email )

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