Cracking the Conundrum
35 Pages Posted: 13 Oct 2008
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
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