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Always and Everywhere Inflation? Treasuries Variance Decomposition and the Impact of Monetary Policy

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  • Alexandros Kontonikas
  • Charles Nolan
  • Zivile Zekaite

Abstract

This paper investigates the sources of variation in Treasury bonds returns and the role of monetary policy over the last three decades. At the first stage of our analysis, we decompose unexpected excess returns on 2-, 5- and 10-year Treasury bonds in three components related to revisions in expectations (news) about future excess returns, inflation and real interest rates. Our results indicate that inflation news is the key driver of Treasury bond returns. At the second stage, we evaluate the impact of conventional and unconventional monetary policy on Treasury bond returns and their components. We find that the positive impact of monetary policy easing on Treasury bond returns is largely explained through downward revisions in inflation expectations.

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  • Alexandros Kontonikas & Charles Nolan & Zivile Zekaite, 2015. "Always and Everywhere Inflation? Treasuries Variance Decomposition and the Impact of Monetary Policy," Working Papers 2015_17, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2015_17
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    Keywords

    Bond Market Variance Decomposition; Monetary Policy; Financial Crisis.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G01 - Financial Economics - - General - - - Financial Crises
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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