Forward Guidance in the Yield Curve: Short Rates versus Bond Supply

Dimitri Vayanos, Robin Greenwood and Samuel Hanson

No 11005, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We present a model of the yield curve in which the central bank can provide market participants with forward guidance on both future short rates and on future Quantitative Easing (QE) operations, which affect bond supply. Forward guidance on short rates works through the expectations hypothesis, while forward guidance on QE works through expected future bond risk premia. If a QE operation is expected to be undone in the near term, then its announcement will have a hump-shaped effect on the yield and forward-rate curves; otherwise the effect may be increasing with maturity. Humps associated to QE announcements typically occur at maturities longer than those associated to short-rate announcements, even when the effects of the former are expected to last over a shorter horizon. We use our model to re-examine the empirical evidence on QE announcements in the US.

Keywords: Central banks; Forward guidance; Limited arbitrage; Quantitative easing; Yield curve (search for similar items in EconPapers)
JEL-codes: E43 E52 G12 H63 (search for similar items in EconPapers)
Date: 2015-12
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
https://cepr.org/publications/DP11005 (application/pdf)

Related works:
Chapter: Forward Guidance in the Yield Curve: Short Rates versus Bond Supply (2016)
Working Paper: Forward Guidance in the Yield Curve: Short Rates versus Bond Supply (2015)
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:cpr:ceprdp:11005

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP11005

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().