Time-Varying Yield Curve Dynamics and Monetary Policy

Haroon Mumtaz and Paolo Surico ()

No 23, Discussion Papers from Monetary Policy Committee Unit, Bank of England

Abstract: The dynamics of the US economy are modelled using a time-varying structural vector autoregression that incorporates information from the yield curve. We find important changes in the dynamics of macroeconomic variables such as inflation and the federal funds rate. In addition our results suggest a change in the relationship between the yield curve and macroeconomic variables. The monetary policy shocks of the early 1980s explain a large portion of the persistence of inflation and the level of the yield curve. Shocks to the level of the yield curve account for the persistence of the federal funds rate. We use our time-varying model provides to revisit the evidence on the expectations hypothesis.

Keywords: Nelson-Siegel; time variation; inflation expectations; credibility building; evidence on expectations hypothesis (search for similar items in EconPapers)
JEL-codes: C15 E44 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2008-03
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Journal Article: Time-varying yield curve dynamics and monetary policy (2009)
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