Monetary policy uncertainty and the response of the yield curve to policy shocks

Arbeitspapier

This paper studies the non-linear response of the term structure of interest rates to monetary policy shocks. We show that uncertainty about monetary policy changes the way the term structure responds to monetary policy. A policy tightening leads to a significantly smaller increase in long-term bond yields if policy uncertainty is high at the time of the shock. We also look at the decomposition of bond yields into expectations about policy and the term premium. The weaker response of yields is driven by the fall in term premia, which fall even more if uncertainty about policy is high. These findings are robust to the measurement of monetary policy uncertainty and the definition of the monetary policy shock. We argue that short-term uncertainty about monetary policy tends to make yields of longer maturities relatively more attractive. As a consequence, investors demand lower term premia. This intuition is supported by the fact that long-term monetary policy uncertainty leads to opposite effects with term premia increasing even more after a policy shock.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: MAGKS Joint Discussion Paper Series in Economics ; No. 24-2017

Classification and Topics

• Classification: Wirtschaft ; Interest Rates: Determination, Term Structure, and Effects ; Central Banks and Their Policies ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: Monetary policy uncertainty ; term structure ; term premium ; unconventional monetary policy ; local projections

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Tillmann, Peter
• Event: Veröffentlichung
• (who): Philipps-University Marburg, School of Business and Economics
• (where): Marburg
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/174320
• Last update: 10.03.2025, 11:45 AM CET