Shock and awe? Bond yield responses to domestic monetary policy in a small-open economy

Thomas Nitschka and Marc-Antoine Ramelet

Economics Letters, 2023, vol. 231, issue C

Abstract: We use Switzerland as a case study to assess the channels through which the domestic monetary policy of a small-open economy affects benchmark interest rates. Monetary-policy shocks are identified via changes in expectations on announcement days. We show that the shocks have a persistent effect on long-term government bond yields because they influence expectations about future short-term rates (the so-called signaling channel). By contrast, monetary-policy shocks have little impact on the term premium component of the bond yields (portfolio rebalancing channel). The full effect of the monetary-policy shocks takes time to build up, but eventually transmits one-to-one to long-term yields, in turn conducting the transmission of monetary policy to the wider economy.

Keywords: Bond yield; Decomposition; Monetary policy; Shocks (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:231:y:2023:i:c:s0165176523003336

DOI: 10.1016/j.econlet.2023.111308

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