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Dynamics of the term structure of UK interest rates

Francesco Bianchi, Haroon Mumtaz and Paolo Surico

No 363, Bank of England working papers from Bank of England

Abstract: This paper models the evolution of monetary policy, the term structure of interest rates and the UK economy across policy regimes. We model the interaction between the macroeconomy and the term structure using a time-varying VAR model augmented with the factors from the yield curve. Our results suggest that the level, slope and curvature factors display substantial time variation, with the level factor moving closely with measures of inflation expectations. Our estimates indicate a large decline in the volatility of both yield curve and macroeconomic variables around 1992, when the United Kingdom first adopted an inflation-targeting regime. During the inflation-targeting regime, monetary policy shocks have been more muted and inflation expectations have been lower than in the pre-1992 era. The link between the macroeconomy and the yield curve has also changed over time, with fluctuations in the level factor becoming less important for inflation after the Bank of England independence in 1997. Policy rates appear to have responded more systematically to inflation and unemployment in the current regime. We use our time-varying macro-finance model to revisit the evidence on the expectations hypothesis.

Keywords: Term structure; time-varying VAR; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E50 E58 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2009-03-20
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Working Paper: Dynamics of the Term Structure of UK Interest Rates (2010) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0363

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