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Working Paper
Affine term structure pricing with bond supply as factors
This paper presents a theoretical model for analyzing the effect of the maturity structure of government debt on the yield curve. It is an ATSM (affine term structure model) in which the factors for the yield curve include, in addition to the short rate, the government bond supply for each maturity. The supply shock is not restricted to be perfectly correlated across maturities. The effect on the yield curve of a bond supply shock that is local to a maturity is largest at the maturity. This hump-shaped response of the yield curve persists in spite of the absence of preferred-habitat investors.
Working Paper
Maturity Structure and Liquidity Risk
This paper studies the optimal maturity structure for government debt when markets for liquidity insurance are incomplete or non-competitive. There is no fiscal risk. Government debt in the model solves a dynamic inefficiency. Issuing debt in short and long maturities solves a liquidity insurance problem, but optimal yield curve policy is only possible if long-duration debt is rendered illiquid. Optimal policy is implementable through treasury operations only--adjustments in the primary deficit are not necessary.
Journal Article
Recession Prediction on the Clock
The jobless unemployment rate is a reliable predictor of recessions, almost always showing a turning point shortly before recessions but not at other times. Its success in predicting recessions is on par with the better-known slope of the yield curve but at a shorter horizon. Hence, it performs better for predicting recessions in the near term. Currently, this data and related series analyzed using the same method are not signaling that a recession is imminent, although that may change in coming months.
Understanding the “Swoosh”-Shaped Yield Curve for Treasuries
An analysis of the yield curve for Treasuries suggests that while the market sees a gradual decline in short-term interest rates, it also expects rates to rise in the long run.
Working Paper
A Comparison of Fed "Tightening" Episodes since the 1980s
This article examines how the real economy and inflation and inflation expectations evolved in response to the six tightening episodes enacted by the FOMC since 1983. The findings indicate that the sixth episode (2015-2018) differed in several key dimensions compared with the previous five episodes. In the first five episodes, the data show the FOMC was generally tightening into a strengthening economy with building price pressures. In contrast, in the final episode the FOMC began its tightening regime during a deceleration in economic activity ...
Working Paper
Resolving the spanning puzzle in macro-finance term structure models
Previous macro-finance term structure models (MTSMs) imply that macroeconomic state variables are spanned by (i.e., perfectly correlated with) model-implied bond yields. However, this theoretical implication appears inconsistent with regressions showing that much macroeconomic variation is unspanned and that the unspanned variation helps forecast excess bond returns and future macroeconomic fluctuations. We resolve this contradiction?or ?spanning puzzle??by reconciling spanned MTSMs with the regression evidence, thus salvaging the previous macro-finance literature. Furthermore, we ...
What Is Yield Curve Control?
Australia and Japan have recent experience in controlling the yield curve as a tool to conduct monetary policy. The U.S. did so in the 1940s and early 1950s.
Journal Article
The Fed’s Yield-Curve-Control Policy
The recent global financial crisis left governments in many advanced countries with very heavy debt burdens and their central banks with huge portfolios of government bonds. With many central banks today still facing policy rates that are uncomfortably close to zero, some may follow the example of Japan, which recently added a new long-term interest rate target to its short-term target to give itself ?yield-curve control.? The Federal Reserve?s foray into similar territory around the Second World War suggests that combining yield-curve control with quantitative easing when government ...
Report
Corporate Debt Maturity and Monetary Policy
Do firms lengthen the maturity of their borrowing following a flattening of the Treasury yield curve that results from monetary policy operations? We explore this question separately for the years before and during the zero lower bound (ZLB) period, recognizing that the same change in the yield curve slope signifies different states of the economy and monetary policy over the two regimes. We find that the answer is robustly yes for the pre-ZLB period: Firms extended the maturity of their bond issuance by nearly three years in response to a policy-induced reduction of 1 percentage point in the ...
Working Paper
Nominal rigidities in debt and product markets
Standard models used for monetary policy analysis rely on sticky prices. Recently, the literature started to explore also nominal debt contracts. Focusing on mortgages, this paper compares the two channels of transmission within a common framework. The sticky price channel is dominant when shocks to the policy interest rate are temporary, the mortgage channel is important when the shocks are persistent. The first channel has significant aggregate effects but small redistributive effects. The opposite holds for the second channel. Using yield curve data decomposed into temporary and persistent ...