Working Paper: NBER ID: w12454
Authors: Kenneth N. Kuttner
Abstract: This paper addresses the possible role of bond prices as operating or intermediate targets for monetary policy. The paper begins with a brief review of the mechanisms through which a central bank could, in theory, influence long-term interest rates, and continues with a brief narrative overview of debt management policies in the U.S., tracing their effects on the maturity distribution of outstanding publicly-held Treasury debt and the composition of the assets held by the Federal Reserve System. The empirical section presents new econometric evidence on the effects of these policies on expected excess holding returns ("term premia"), demonstrating that changes in the Fed's holdings of long-term securities have had statistically significant and economically meaningful effects on the term premia associated with Treasury securities with maturities in the two- to five-year range.
Keywords: bond prices; monetary policy; interest rates; debt management
JEL Codes: E43; E58; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Central Bank Announcements (E52) | Expectations of Future Short-Term Interest Rates (E43) |
| Expectations of Future Short-Term Interest Rates (E43) | Long-Term Bond Yields (E43) |
| Central Bank Announcements (E52) | Long-Term Bond Yields (E43) |
| Federal Reserve's Holdings of Long-Term Securities (E43) | Term Premia of Treasury Securities (E43) |
| Federal Reserve's Holdings of Long-Term Securities (E43) | Long-Term Bond Yields (E43) |