Asymmetric Monetary Policy Rules and the Yield Curve

20 Pages Posted: 20 Mar 2006

See all articles by Matthew P. Dorsten

Matthew P. Dorsten

California Institute of Technology

Vineer Bhansali

LongTail Alpha, LLC

Mark B. Wise

California Institute of Technology

Date Written: March 14, 2006

Abstract

Simple models of central bank behavior can produce highly complex yield curve shapes. Using the Taylor rule and its extensions as building blocks, we construct a robust framework for generating realistic yield curves and the evolution of the economy. Our main focus is the impact on the yield curve and the economy of asymmetrically accomodative policy, typically called the "deflation put." We find that for economies like the U.S. the deflation put reduces yields for all maturities. We also find that in highly leveraged economies (such as Japan) the consequence of an asymmetric deflation fighting policy may result in improved economic conditions, but also raises the possibility of higher long term yields as a consequence.

Keywords: Yield Curve, Monetary Policy

JEL Classification: G1, E4, E5

Suggested Citation

Dorsten, Matthew P. and Bhansali, Vineer and Wise, Mark B., Asymmetric Monetary Policy Rules and the Yield Curve (March 14, 2006). Available at SSRN: https://ssrn.com/abstract=890791 or http://dx.doi.org/10.2139/ssrn.890791

Matthew P. Dorsten

California Institute of Technology ( email )

Pasadena, CA 91125
United States

Vineer Bhansali

LongTail Alpha, LLC ( email )

500 Newport Center Drive
Suite 820
Newport Beach, CA 92660
United States

Mark B. Wise (Contact Author)

California Institute of Technology ( email )

Pasadena, CA 91125
United States
626-395-6687 (Phone)
626-568-8473 (Fax)

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