Endogenous Monetary Policy Shifts and the Term Structure: Evidence from Japanese Government Bond Yields

Abstract

I construct a no-arbitrage term structure model with endogenous regime shifts and apply it to Japanese government bond (JGB) yields. This application subjects the short-term interest rate to monetary regime shifts, such as a zero interest rate policy (ZIRP) and normal regimes, which depend on macroeconomic variables. The estimated results show that under a ZIRP, the deflationary effect on bond yields increases on the longer end of yield curves; on the other hand, the effect of output gaps on raising bond yields weakens for all maturities.

Keywords: Zero interest rate policy, Endogenous regime shifts, Term structure of interest rates, Financial markets and the macroeconomy

JEL Classification: C13, C32, E43, E44, E52