A Preferred Habitat View of Yield Curve Control

Junko Koeda and Yoichi Ueno
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Junko Koeda: Waseda University
Yoichi Ueno: Bank of Japan

No 22-E-7, Bank of Japan Working Paper Series from Bank of Japan

Abstract: We extend the canonical preferred habitat term structure model of Vayanos and Vila (2021) to analyze yield curve control (YCC) by treating the central bank as a preferred habitat investor allowing the price elasticity of government bond demand to depend on its targeted yield. The price elasticity captures the strictness of YCC implemented by the central bank. We calibrate the model for Japan and find that sufficiently strict YCC requires limited additional bond purchases to keep the targeted yield within the targeted range, and attenuates the impact of short-rate changes in the yield curve. In the absence of YCC, the effect of bond demand and supply on bond yields increases once again as the influence of the effective lower bound on nominal interest rates weakens.

Keywords: monetary policy; yield curve control; preferred habitat (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 G12 (search for similar items in EconPapers)
Date: 2022-08-01
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Citations: View citations in EconPapers (1)

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