The impact of monetary policy on expectations along the yield curve

Böck, Maximilian ORCID: and Feldkircher, Martin ORCID: (2020) The impact of monetary policy on expectations along the yield curve. Department of Economics Working Paper Series, 306. WU Vienna University of Economics and Business, Vienna.


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This article investigates how market participants adjust their expectations of interest rates at different maturities in response to a monetary policy and a central bank information shock for the US economy. The results show that market participants adjust their expectations faster to changes in interest rates compared to new releases of information by the central bank. This finding could imply that central bank information shocks are more opaque whereas a change in interest rates provides a stronger signal to the markets. Moreover, financial market agents respond with an initial underreaction to both shocks, potentially resembling inattention or overconfidence. Last, we find that the adjustment of expectations for yields with higher maturities takes considerably longer than for short-term yields. This finding is especially important for central banks since in the current low-interest rate environment monetary policy actions mainly consist of policies aimed at the long-end of the yield curve.

Item Type: Paper
Keywords: monetary policy, expectation formation, belief bias
Classification Codes: JEL C32, D83, D84, E52, E70, G40
Divisions: Departments > Volkswirtschaft
Depositing User: Claudia Tering-Raunig
Date Deposited: 04 Jan 2021 09:00
Last Modified: 07 May 2021 16:25


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