Working Paper: NBER ID: w15270
Authors: Andrew Ang; Jean Boivin; Sen Dong; Rudy Lookung
Abstract: We estimate the effect of shifts in monetary policy using the term structure of interest rates. In our no-arbitrage model, the short rate follows a version of the Taylor (1993) rule where the coefficients on the output gap and inflation vary over time. The monetary policy loading on the output gap has averaged around 0.4 and has not changed very much over time. The overall response of the yield curve to output gap components is relatively small. In contrast, the inflation loading has changed substantially over the last 50 years and ranges from close to zero in 2003 to a high of 2.4 in 1983. Long-term bonds are sensitive to inflation policy shifts with increases in inflation loadings leading to higher short rates and widening yield spreads.
Keywords: Monetary Policy; Term Structure; Interest Rates
JEL Codes: E4; E5; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy shifts (E63) | term structure of interest rates (E43) |
| Fed's response to inflation (E52) | short-term rates (E43) |
| Fed's response to inflation (E52) | term spread (C41) |
| output gap stance (E66) | short-term rates (E43) |
| output gap stance (E66) | term spread (C41) |
| Fed's response to inflation (E52) | Fed's sensitivity to inflation (E52) |
| inflation response changes (E31) | monetary policy discretion (E60) |