Monetary policy and the term structure of nominal interest rates: evidence and theory
Charles Evans and
David Marshall
No WP-97-10, Working Paper Series, Macroeconomic Issues from Federal Reserve Bank of Chicago
Abstract:
This paper explores how exogenous impulses to monetary policy affect the yield curve for nominally risk-free bonds. We identify monetary policy shocks using three distinct variants of the identified VAR methodology. All three approaches imply similar patterns for the effect of monetary policy shocks on the term structure: A contractionary policy shock induces a pronounced positive but short-lived response in short term interest rates, with a smaller effect on medium-term rates and almost no effect on long term rates. Because of their transitory impact, monetary policy shocks account for a relatively small fraction of the long-run variance on interest rates. The response of the yield curve to a monetary policy shock is unambiguously a liquidity effect rather than an expected inflation effect. We then ask whether a dynamic stochastic equilibrium model that incorporates nominal rigidities can replicate these patterns. We find that the limited participation model of Lucas (1990), Fuerst (1992), and Christiano and Eichenbaum (1995), is broadly consistent with the data, provided modest adjustment costs are imposed on monetary balances available to satisfy households cash-in-advance constraint.
Keywords: Monetary policy; Bonds (search for similar items in EconPapers)
Date: 1997
References: Add references at CitEc
Citations: View citations in EconPapers (11)
There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.
Related works:
Journal Article: Monetary policy and the term structure of nominal interest rates: Evidence and theory (1998) 
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:fip:fedhma:wp-97-10
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Paper Series, Macroeconomic Issues from Federal Reserve Bank of Chicago Contact information at EDIRC.
Bibliographic data for series maintained by Lauren Wiese ().