The Expectations Theory Works for Monetary Policy Shocks

22 Pages Posted: 19 Jun 2006

See all articles by Jennifer E. Roush

Jennifer E. Roush

Board of Governors of the Federal Reserve System

Abstract

In practice, the expectations theory of the term structure is employed extensively in monetary policy analysis despite its empirical failure. This paper performs a conditional test of the theory that is directly relevant to monetary theory and policy. It finds that the theory holds quite well conditional on identified monetary policy shocks, but fails conditional on aggregate supply shocks that prompt an immediate jump in prices. It also finds that policy responses to movements in the term structure play an important role in uncovering evidence for the theory as predicted by McCallum (1994).

Keywords: term structure, monetary policy, structural vector autoregression, simultaneity, identification

JEL Classification: C11, C32, E43, E44, E52

Suggested Citation

Roush, Jennifer E., The Expectations Theory Works for Monetary Policy Shocks. Journal of Monetary Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=909545

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