Taylor Rule Yield Curve
Tomohide Mineyama and
No e156, Working Papers from Tokyo Center for Economic Research
We propose the Taylor rule yield curve for the United States, which is an extension of the Taylor rule for the short-term policy rate to points in time in the future horizon. The estimated Taylor rule expected rates are useful for considering the monetary policy stance reflected in the entire yield curve, which is valid even during the periods when the federal funds rate (FFR) hits its effective lower bound (ELB). The analysis shows that the Taylor rule deviations (TRDs), the gap between the Taylor rule expected rates and market Overnight Index Swap (OIS) rates, for maturities much longer than overnight could influence the outputgap and inflation rates in the United States, even during the period when the FFR hit the ELB for a considerable duration and the Federal Reserve resorted to an unconventional monetary policy. Moreover, the TRDs for long maturities can be regarded as a measure of risk appetite in financial markets. Our methodology in this study can be directly applied for analysis in other countries that experienced similar periods of policy rates hitting their ELBs, as long as data on economists' forecasts of output and inflation are available.
Pages: 44 pages
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