Conundrum or Complication: A Study of Yield Curve Dynamics under Unusual Economic Conditions and Monetary Policies

Peter Cripwell and David Edelman
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Peter Cripwell: School of Business, University College Dublin
David Edelman: School of Business, University College Dublin

No 200836, Working Papers from Geary Institute, University College Dublin

Abstract: The definition of the decline of long term yields in the light of increasing short term yields as a conundrum by Chairman Greenspan in February 2005 has generated a significant amount of research. This paper presents a study of yield curve dynamics over this period using economic surprise data as the diagnostic tool. Results are presented for both US and Japanese data which indicate a non-linear response of the yield curve to economic data and monetary policy over the period in question. Further, a limited model is presented that is consistent with the observations. This can lead to an explanation of the conundrum in terms of a non-linear yield response to expected long term inflation and a variable expected long term real rate.

Keywords: federal reserve; term structure of interest rates; inflation (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2010-04-12
New Economics Papers: this item is included in nep-mac and nep-mon
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