The Long and the Short End of the Term Structure of Policy Rules

Josephine M. Smith () and John B. Taylor ()

No 13635, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We first document a large secular shift in the estimated response of the entire term structure of interest rates to inflation and output in the United States. The shift occurred in the early 1980s. We then derive an equation that links these responses to the coefficients of the central bank's monetary policy rule for the short-term interest rate. The equation reveals two countervailing forces that help explain and understand the nature of the link and how its sign is determined. Using this equation, we show that a shift in the policy rule in the early 1980s provides an explanation for the observed shift in the term structure. We also explore a shift in the policy rule in the 2002-2005 period and its possible effect on long-term rates.

JEL-codes: E43 E44 E52 E58 E65 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: Written
Note: ME
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