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Expectations, Bond Yields and Monetary Policy

Albert Chun ()

Finance from EconWPA

Abstract: Through explicitly incorporating analysts' forecasts as observable factors in a dynamic arbitrage- free model of the yield curve, this paper proposes a framework for studying the impact of shifts in market sentiment on interest rates of all maturities. An empirical examination reveals that survey expectations about in°ation, output growth and the anticipated path of monetary policy actions contain important information for explaining movements in bond yields. Although perceptions about in°ation are largely responsible for movements in long-term interest rates, an explicit slope factor is necessary to adequately capture the dynamics of the yield curve. Macroeconomic forecasts play an important role in explaining time-variation in the market prices of risk, with forecasted GDP growth playing a dominant role. The estimated coe±cients from a forward-looking monetary policy rule support the assertion that the central bank preemptively reacts to in°ationary expectations while suggesting patience in accommodating real output growth expectations. Models of this type may provide traders and policymakers with a new set of tools for formally assessing the reaction of bond yields to shifts in market expectations due to the arrival of news or central bank statements and announcements.

Keywords: term structure; interest rates; affine model; forward-looking policy rule; macro-finance; no-arbitrage; blue-chip forecasts; survey data (search for similar items in EconPapers)
JEL-codes: E40 E43 E44 G12 D84 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fin, nep-fmk, nep-for, nep-mac and nep-mon
Date: 2005-12-06
Note: Type of Document - pdf; pages: 1
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http://econwpa.repec.org/eps/fin/papers/0512/0512006.pdf (application/pdf)

Related works:
Journal Article: Expectations, Bond Yields, and Monetary Policy (2011) Downloads
Working Paper: Expectations, Bond Yields and Monetary Policy (2010) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0512006

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