Working Paper: NBER ID: w13635
Authors: Josephine M. Smith; John B. Taylor
Abstract: We first document a large secular shift in the estimated response of the entire term structure of interest rates to inflation and output in the United States. The shift occurred in the early 1980s. We then derive an equation that links these responses to the coefficients of the central bank's monetary policy rule for the short-term interest rate. The equation reveals two countervailing forces that help explain and understand the nature of the link and how its sign is determined. Using this equation, we show that a shift in the policy rule in the early 1980s provides an explanation for the observed shift in the term structure. We also explore a shift in the policy rule in the 2002-2005 period and its possible effect on long-term rates.
Keywords: No keywords provided
JEL Codes: E43; E44; E52; E58; E65; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| secular shift in the monetary policy rule in the mid-1980s (E65) | significant change in the term structure of interest rates (E43) |
| increase in inflation (E31) | larger rise in long-term interest rates post-1984 (E43) |
| shifts in policy rules (E61) | changes in interest rate responses (E43) |
| response coefficients for inflation and output increase (E31) | stronger reaction of long-term yields to these macroeconomic variables (E49) |
| policy rule shifts (E61) | countervailing effects on long-term yields (E43) |