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The Impact of Monetary Policy on Yield Curve Expectations

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  • Boeck, Maximilian
  • Feldkircher, Martin

Abstract

A great deal of monetary policy is aimed at steering market expectations but little is known about agents belief formation. This article investigates how US market participants adjust yield curve expectations in response to two shocks related to monetary policy. The results show that in the aggregate, market participants initially underreact to changes in monetary policy. This implies that news are not fully absorbed, which potentially impedes a smooth monetary policy transmission. We further show that these information rigidities could be driven by a lack of information diffusion among individual forecasters. Last, we find that depending on the source of the shock and the maturities of the yields, underreaction is followed by a period of overcompensation a pattern called delayed overshooting. Knowing this allows the central bank to better calibrate their actions in the first place, which could pave the way for more optimal monetary policy.

Suggested Citation

  • Boeck, Maximilian & Feldkircher, Martin, 2021. "The Impact of Monetary Policy on Yield Curve Expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 887-901.
    • Handle: RePEc:eee:jeborg:v:191:y:2021:i:c:p:887-901
    DOI: 10.1016/j.jebo.2021.09.044
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    More about this item

    Keywords

    Monetary policy; Expectation formation; Belief bias;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • G40 - Financial Economics - - Behavioral Finance - - - General

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