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The impact of monetary policy on expectations along the yield curve

Maximilian Böck and Martin Feldkircher

Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics

Abstract: This article investigates how market participants adjust their expectations of interest rates at different maturities in response to a monetary policy and a central bank information shock for the US economy. The results show that market participants adjust their expectations faster to changes in interest rates compared to new releases of information by the central bank. This finding could imply that central bank information shocks are more opaque whereas a change in interest rates provides a stronger signal to the markets. Moreover, financial market agents respond with an initial underreaction to both shocks, potentially resembling inattention or overconfidence. Last, we find that the adjustment of expectations for yields with higher maturities takes considerably longer than for short-term yields. This finding is especially important for central banks since in the current low-interest rate environment monetary policy actions mainly consist of policies aimed at the long-end of the yield curve.

Keywords: monetary policy; expectation formation; belief bias (search for similar items in EconPapers)
JEL-codes: C32 D83 D84 E52 E70 G40 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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