The effects of monetary policy regime shifts on the term structure of interest rates

Abdymomunov Azamat () and Kang Kyu Ho
Additional contact information
Abdymomunov Azamat: Federal Reserve Bank of Richmond, 530 East Trade Street, Charlotte, NC 28202, USA
Kang Kyu Ho: Department of Economics, Korea University, Seoul, 136-701, Korea

Studies in Nonlinear Dynamics & Econometrics, 2015, vol. 19, issue 2, 183-207

Abstract: We investigate how the entire term structure of interest rates is influenced by changes in monetary policy regimes. To do so, we develop and estimate an arbitrage-free dynamic term-structure model which accounts for regime shifts in monetary policy and price of risk. Our results for US data from 1985 through 2008 indicate that (i) the Federal Reserve’s reaction to inflation has changed over time, switching between “active” and “passive” monetary policy regimes; (ii) on average, the term spread in the “active” regime was wider than in the “passive” regime; and (iii) the yields in the “active” regime were considerably more volatile than in the “passive” regime. The wider term spread in the “active” regime reflects higher term premia associated with a more sensitive response of the short-term interest rate to inflation. Additionally, our analysis suggests that the model fit improves substantially when we account for regime switching in monetary policy and price of risk.

Keywords: affine no-arbitrage model; Markov switching process; term structure of interest rates (search for similar items in EconPapers)
JEL-codes: C11 E43 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/snde-2013-0031 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:sndecm:v:19:y:2015:i:2:p:183-207:n:1

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/snde/html

DOI: 10.1515/snde-2013-0031

Access Statistics for this article

Studies in Nonlinear Dynamics & Econometrics is currently edited by Bruce Mizrach

More articles in Studies in Nonlinear Dynamics & Econometrics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().