DP4360 Why are Long Rates Sensitive to Monetary Policy?

Author(s): Tore Ellingsen, Ulf Söderström
Publication Date: April 2004
Keyword(s): central bank private information, excess sensitivity, term structure of interest rates, yield curve
JEL(s): E43, E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4360

We use a quantitative model of the US economy to analyse the response of long-term interest rates to monetary policy, and compare the model results with empirical evidence. We find that the model can explain the strong and time-varying yield curve response to monetary policy innovations found in the data. A key ingredient in explaining the yield curve response is central bank private information about the state of the economy or about its own target for inflation.