Working Paper: CEPR ID: DP4360
Authors: Tore Ellingsen; Ulf Sderstrm
Abstract: We use a quantitative model of the US economy to analyse the response of long-term interest rates to monetary policy, and compare the model results with empirical evidence. We find that the model can explain the strong and time-varying yield curve response to monetary policy innovations found in the data. A key ingredient in explaining the yield curve response is central bank private information about the state of the economy or about its own target for inflation.
Keywords: central bank; private information; excess sensitivity; term structure of interest rates; yield curve
JEL Codes: E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy innovations (E52) | yield curve response (E43) |
| lack of private information (D82) | insensitivity of long rates (E43) |
| private information (D82) | sensitivity of long rates (E43) |
| endogenous policy innovations (O25) | movement of all interest rates (E43) |
| exogenous innovations (O36) | opposite movement of long and short rates (E43) |
| central bank private information (E58) | causal relationship between monetary policy and long-term interest rates (E43) |