The US term structure and central bank policy

Enzo Weber and Juergen Wolters

Applied Economics Letters, 2012, vol. 19, issue 1, 41-45

Abstract: The Expectations Hypothesis of the Term Structure (EHT) implies cointegration between interest rates of different maturities and predicts certain values for adjustment speed. We estimate reduced-form Vector Error Correction Models (VECMs) of the US term structure. These are derived from a structural model combining the EHT, autocorrelated risk premia, interest rate smoothing and monetary policy feedback, which is able to capture a wide range of empirical outcomes. We explicitly test the necessary preconditions for the validity of the theoretical model. Premia persistence rises with longer-rate maturity, whereas the influence of the according spreads in the central bank reaction function diminishes.

Date: 2012
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Working Paper: The US Term Structure and Central Bank Policy (2009)
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DOI: 10.1080/13504851.2011.566171

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