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Equilibrium Yield Curve, the Phillips Curve, and Monetary Policy

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  • MITSURU KATAGIRI

Abstract

Upward‐sloping yield curves are hard to reconcile with the positive relationship between income and inflation (the Phillips curve) in consumption‐based asset pricing models. Using the U.S. and the UK data, this paper shows inflation is negatively correlated with long‐run income growth but positively correlated with cyclical income, thus enabling the model to replicate positive and sizable term premiums, along with the Phillips curve over business cycles. According to the model, a permanently low‐growth and low‐inflation environment would precipitate flatter yield curves due to constraints to monetary policy around the zero lower bound.

Suggested Citation

  • Mitsuru Katagiri, 2022. "Equilibrium Yield Curve, the Phillips Curve, and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(8), pages 2235-2272, December.
    • Handle: RePEc:wly:jmoncb:v:54:y:2022:i:8:p:2235-2272
    DOI: 10.1111/jmcb.12919
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    1. Memmel, Christoph & Heckmann-Draisbach, Lotta, 2023. "Banks' net interest margin and changes in the term structure," Discussion Papers 11/2023, Deutsche Bundesbank.

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