Term Structure, Forecast Revision and the Signaling Channel of Monetary Policy

40 Pages Posted: 10 Apr 2019

Date Written: March 21, 2019

Abstract

Monetary policy shocks affect interest rates at long horizons (10 years or more). Furthermore, the private sector’s real GDP forecasts are revised upward in response to a monetary tightening. These facts challenge the prevailing theories in academic and policy circles. In this paper, I propose a micro-founded model to rationalize those facts, based on the signaling channel of monetary policy. I consider a framework where the central bank has private information about future economic conditions. Agents update their beliefs according to Bayes’ theorem. Policy actions play a signaling role, and may therefore rationalize the above empirical findings.

Keywords: Monetary Policy, Yield Curve, Professional Forecasts, Information Frictions, Kalman Filter

JEL Classification: E32, E43, E44, E52, E58

Suggested Citation

Zhang, Donghai, Term Structure, Forecast Revision and the Signaling Channel of Monetary Policy (March 21, 2019). Available at SSRN: https://ssrn.com/abstract=3357480 or http://dx.doi.org/10.2139/ssrn.3357480

Donghai Zhang (Contact Author)

University of Bonn ( email )

Bonn
Germany

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