Citation

Discussion Paper Details

Please find the details for DP7096 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Monetary Policy Regimes and the Term Structure of Interest Rates

Author(s): Ruslan Bikbov and Mikhail Chernov

Publication Date: December 2008

Keyword(s): great moderation, monetary policy, regime switches, structural VAR and term structure model

Programme Area(s): Financial Economics

Abstract: This paper proposes to investigate whether US monetary policy changed over time by evaluating evidence from the entire yield curve. A regime-switching no-arbitrage term structure model relies on inflation, output and the short interest rate as factors. In a departure from the finance literature, the model is complemented with identifying assumptions that allow the private sector (inflation and output dynamics) to be separated from monetary policy (short interest rate). The model posits regime changes in the volatility of exogenous output and inflation shocks, in the monetary policy rule, and in the volatility of monetary shocks. The monetary policy regimes cannot be identified correctly if the yield curve is ignored during estimation. Counterfactual analysis uses the disentangled regimes in policy and shocks to understand their importance for the great moderation. The low-volatility regime of exogenous shocks during the last two decades plays an important role, while monetary policy contributes by trading off asymmetric responses of output and inflation under different regimes.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7096

Bibliographic Reference

Bikbov, R and Chernov, M. 2008. 'Monetary Policy Regimes and the Term Structure of Interest Rates'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7096