Monetary Policy Regimes and the Term Structure of Interest Rates

Mikhail Chernov and Ruslan Bikbov

No 7096, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Great moderation; Monetary policy; Regime switches; Structural var; Term structure model (search for similar items in EconPapers)
JEL-codes: C52 E43 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Monetary policy regimes and the term structure of interest rates (2013)
Working Paper: Monetary Policy Regimes and the Term Structure of Interest Rates (2009)
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