Bond Markets and Monetary Policy

Handbook of Fixed-Income Securities, First Edition. Edited by Pietro Veronesi. 2015 John Wiley Sons, Inc.

25 Pages Posted: 24 Jun 2015 Last revised: 2 Jul 2015

Andrea Buraschi

The University of Chicago; Imperial College Business School; Centre for Economic Policy Research (CEPR)

Paul Whelan

Copenhagen Business School

Date Written: April 2015

Abstract

Since the early 1990’s, and until the 2008 financial crisis, the main policy tool of the FOMC has been a nominal interest rate target. This paper surveys an extensive literature that studies the link between monetary policy and the dynamics of bond yields. This literature uses ‘high-frequency’ identification around FOMC announcements to measure shocks to market participant’s expectations about the current and future stance of monetary policy. Summarising the literature, we argue monetary policy affects yields at all maturities because of two types of shock: (i) shocks to the target rate; and (ii) shocks to the future path of the monetary policy. Interestingly, compelling evidence shows that path shocks are not linked to changes in expected inflation but linked to two alternative channels: an information and a (real) risk premium channel. We present novel empirical evidence in support of a risk premium channel.

Keywords: interest rates, conventional, monetary policy, taylor rules, FOMC, risk premia

JEL Classification: E43, E44, E50, E51, E52, E58

Suggested Citation

Buraschi, Andrea and Whelan, Paul, Bond Markets and Monetary Policy (April 2015). Handbook of Fixed-Income Securities, First Edition. Edited by Pietro Veronesi. 2015 John Wiley Sons, Inc.. Available at SSRN: https://ssrn.com/abstract=2621706

Andrea Buraschi

The University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
7738347123 (Phone)

HOME PAGE: http://www.andreaburaschi.com/

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.andreaburaschi.com/

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Paul Whelan (Contact Author)

Copenhagen Business School ( email )

Copenhagen Business School
Finance Department
Copenhagen, DC 1854
Denmark

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