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Working Paper
Yield curve and monetary policy expectations in small open economies
This paper estimates a New Keynesian dynamic stochastic general equilibrium (DSGE) model in small open economies using the yield curve data as well as standard macro data. The DSGE model is estimated on the data of three inflation-targeting small open economies (Australia, Canada, and New Zealand) using Bayesian methods. We find that the long-end of the yield curve is highly correlated with the current and future short-term interest rates determined by domestic central banks. Yield curve data are particularly informative about the future stance of monetary policy in Australia and Canada in ...
Discussion Paper
Short-Dated Term Premia and the Level of Inflation
Since the advent of derivatives trading on short-term interest rates in the 1980s, financial commentators have often interpreted market prices as directly reflecting the expected path of future interest rates. However, market prices generally embed risk premia (or “term premia” in reference to measures of risk premia over different horizons) reflecting the compensation required to bear the risk of the asset. When term premia are large in magnitude, derivatives prices may differ substantially from investor expectations of future rates. In this post, we assess whether term premia have ...
Discussion Paper
Interest Rate Derivatives and Monetary Policy Expectations
Market expectations of the path of future policy rates can have important implications for financial markets and the economy. Because interest rate derivatives enable market participants to hedge against or speculate on potential changes in various short-term U.S.interest rates, they are a rich and timely source of information on market expectations. In this post, we describe how information about market expectations can be derived from interest rate futures and forwards, focusing on three main instruments: federal funds futures, overnight index swaps (OIS), and Eurodollar futures. We also ...
Working Paper
Policy Rate Uncertainty and Money Market Funds (MMF) Portfolio Allocations
We find that an increase in policy rate uncertainty is associated with an increase in MMF portfolio allocations towards assets with shorter-dated maturities. We also find that the direction of uncertainty matters: MMF portfolio maturity is more sensitive to uncertainty when it relates to changes in expectations for a larger increase or a smaller decrease in the policy rate than when it relates to changes in expectations for a smaller increase or a larger decrease in the policy rate. Furthermore, for MMF that are eligible to participate at the Federal Reserve's Overnight Reverse Repurchase ...