Monetary Policy Regimes and the Term Structure of Interest Rates

54 Pages Posted: 17 Feb 2009

Date Written: December 2008


This paper proposes to investigate whether US monetary policy changed over time by evaluating evidence from the entire yield curve. A regime-switching no-arbitrage term structure model relies on inflation, output and the short interest rate as factors. In a departure from the finance literature, the model is complemented with identifying assumptions that allow the private sector (inflation and output dynamics) to be separated from monetary policy (short interest rate). The model posits regime changes in the volatility of exogenous output and inflation shocks, in the monetary policy rule, and in the volatility of monetary shocks. The monetary policy regimes cannot be identified correctly if the yield curve is ignored during estimation. Counterfactual analysis uses the disentangled regimes in policy and shocks to understand their importance for the great moderation. The low-volatility regime of exogenous shocks during the last two decades plays an important role, while monetary policy contributes by trading off asymmetric responses of output and inflation under different regimes.

Keywords: great moderation, monetary policy, regime switches, structural VAR, term structure model

JEL Classification: C52, E43

Suggested Citation

Bikbov, Ruslan and Chernov, Mikhail, Monetary Policy Regimes and the Term Structure of Interest Rates (December 2008). CEPR Discussion Paper No. DP7096, Available at SSRN:

Ruslan Bikbov

Columbia Business School ( email )

420 West 118th Street
New York, NY 10027
United States

Mikhail Chernov (Contact Author)

UCLA Anderson ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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