Conundrum or complication: a study of yield curve dynamics under unusual economic conditions and monetary policies

Peter Cripwell and David Edelman

Centre for Financial Markets Working Papers from Research Repository, University College Dublin

Abstract: The definition of the decline of long term yields in the light of increasing short term yields as a conundrum by Chairman Greenspan in February 2005 has generated a significant amount of research. This paper presents a study of yield curve dynamics over this period using economic surprise data as the diagnostic tool. Results are presented for both US and Japanese data which indicate a non-linear response of the yield curve to economic data and monetary policy over the period in question. Further, a limited model is presented that is consistent with the observations. This can lead to an explanation of the conundrum in terms of a non-linear yield response to expected long term inflation and a variable expected long term real rate.

Keywords: Federal Reserve; Term structure of interest rates; Inflation; Interest rates; Monetary policy; Federal Reserve banks (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 (search for similar items in EconPapers)
Date: 2008-03
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Persistent link: https://EconPapers.repec.org/RePEc:rru:cfmwps:10197/1176

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