Working Paper: NBER ID: w13419
Authors: David K. Backus; Jonathan H. Wright
Abstract: From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25%, yet long-maturity yields and forward rates fell. We consider several possible explanations for this "conundrum." The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic and financial market volatility, more predictable monetary policy, and the state of the business cycle.
Keywords: No keywords provided
JEL Codes: E43; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| federal funds rate increases (E52) | decline in long-term yields (E43) |
| decline in term premiums (E43) | falling long forward rates (E43) |
| term premiums (G12) | unemployment rates (J64) |
| term premiums (G12) | inflation expectations (E31) |