Term Structure, Forecast Revision, and the Signaling Channel of Monetary Policy

Donghai Zhang ()

Journal of the European Economic Association, 2022, vol. 20, issue 4, 1522-1553

Abstract: Monetary policy shocks affect interest rates at long horizons (10 years or more). Furthermore, the private sectorâs real GDP forecasts are revised upward in response to a monetary tightening. These facts challenge the prevailing theories in academic and policy circles. In this paper, I propose a micro-founded model to rationalize those facts, based on the signaling channel of monetary policy. I consider a framework where the central bank has private information about future economic conditions. Agents update their beliefs according to Bayes’ theorem. Policy actions play a signaling role, and may therefore rationalize the above empirical findings.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:20:y:2022:i:4:p:1522-1553.

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