Monetary Policy Shifts and the Term Structure

53 Pages Posted: 25 Aug 2009  

Andrew Ang

BlackRock, Inc

Jean Boivin

HEC Montreal; Columbia Business School; National Bureau of Economic Research (NBER)

Sen Dong

Columbia Business School - Economics Department

Rudy J. Loo-Kung

Inter-American Development Bank (IADB)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2009

Abstract

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.

Suggested Citation

Ang, Andrew and Boivin, Jean and Dong, Sen and Loo-Kung, Rudy J., Monetary Policy Shifts and the Term Structure (August 2009). NBER Working Paper No. w15270. Available at SSRN: https://ssrn.com/abstract=1459571

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

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Jean Boivin

HEC Montreal ( email )

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Montreal, Quebec H2X 2L3
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Columbia Business School ( email )

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National Bureau of Economic Research (NBER)

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Sen Dong

Columbia Business School - Economics Department ( email )

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

Rudy J. Loo-Kung

Inter-American Development Bank (IADB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

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