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Monetary policy surprises and their transmission through term premia and expected interest rates

Iryna Kaminska, Haroon Mumtaz and Roman Šustek

Journal of Monetary Economics, 2021, vol. 124, issue C, 48-65

Abstract: Monetary policy moves the yield curve. What is the economic interpretation of such moves and what are their macroeconomic consequences? Applying an affine term structure model to high-frequency yield curve movements around FOMC announcements, we shed new light on these questions. Estimation is subject to restrictions addressing estimation bias in previous studies. By imposing additional structure, expectations and term premia are decomposed into three components interpreted as monetary policy action, expected path and its uncertainty. In a local projections model, the shocks identified by the three components provide insights into monetary policy transmission in the context of existing theories.

Keywords: High-frequency data; Affine term structure model; Estimation bias; Multidimensional policy shocks; Monetary policy transmission (search for similar items in EconPapers)
JEL-codes: C58 E43 E52 E58 G12 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jmoneco.2021.07.009

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