Why are Long Rates Sensitive to Monetary Policy?
35 Pages Posted: 25 May 2004
Date Written: April 2004
We use a quantitative model of the US economy to analyse the response of long-term interest rates to monetary policy, and compare the model results with empirical evidence. We find that the model can explain the strong and time-varying yield curve response to monetary policy innovations found in the data. A key ingredient in explaining the yield curve response is central bank private information about the state of the economy or about its own target for inflation.
Keywords: Term structure of interest rates, yield curve, central bank private information, excess sensitivity
JEL Classification: E43, E52
Suggested Citation: Suggested Citation