Term structure views of monetary policy
Abstract: Term structure models and many descriptions of the transmission of monetary policy rest on the empirical relevance of the expectations hypothesis. Small differences in the perceived policy reaction function in VAR models of agent expectations strongly influence the relevance in the transmission mechanism of the expected short rate component of bond yields. Mean-reverting or difference-stationary characterizations of interest rates require large and volatile term premiums to match the observable term structure. However, short rate descriptions that capture shifting perceptions of long-horizon inflation evident in survey data support a more substantial term structure role for short rate expectations.
File(s): File format is application/pdf https://www.kansascityfed.org/documents/5279/pdf-rwp98-07.pdf
Provider: Federal Reserve Bank of Kansas City
Part of Series: Research Working Paper
Publication Date: 1998