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Monetary policy and the yield curve

Author

Listed:
  • Edward N Gamber

    (Congressional Budget Office)

  • Julie K Smith

    (Lafayette College)

Abstract

The Federal Reserve's movement toward greater transparency in the mid-1990s offers a natural experiment that allows us to investigate the response of the yield curve level, slope and curvature to federal funds rate innovations. Prior to the mid-1990s the yield curve typically steepened in response to such innovations, indicating that financial market participants interpreted changes in the federal funds rate as a signal of the Fed's concern about inflation. Consistent with our hypothesis, since the mid-1990s, as the Fed moved toward greater transparency and as inflation expectations became better anchored, innovations in the federal funds rate have little or no effect on the yield curve slope.

Suggested Citation

  • Edward N Gamber & Julie K Smith, 2020. "Monetary policy and the yield curve," Economics Bulletin, AccessEcon, vol. 40(1), pages 407-424.
    • Handle: RePEc:ebl:ecbull:eb-19-00018
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    File URL: http://www.accessecon.com/Pubs/EB/2020/Volume40/EB-20-V40-I1-P35.pdf
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    References listed on IDEAS

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    Cited by:

    1. Mateut, Simona & Chevapatrakul, Thanaset, 2018. "Customer financing, bargaining power and trade credit uptake," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 147-162.

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    More about this item

    Keywords

    yield curve; Federal Reserve transparency; principal components; slope of yield curve; fed funds rate;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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