Dynamics of the term structure of interest rates and monetary policy: Is monetary policy effective during zero interest rate policy?

Wali Ullah, Yasumasa Matsuda, Yoshihiko Tsukuda

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

Abstract

The monetary policy targets the short rates; however, during zero interest rate policy (ZIRP), the short end of the yield curve cannot serve as a policy instrument. Relying on the joint yields-macro latent factors model, this study empirically examines the effect of monetary policy stances on term structure and the possible feedback effect on the real sector using the Japanese experience of ZIRP. The analysis indicates that it is the entire term structure that transmits the policy shocks to the real economy rather than the yield spread only. The monetary policy signals pass through the yield curve level and slope factors to stimulate the economic activity. The curvature factor, besides reflecting the cyclical fluctuations of the economy, acts as a leading indicator for future inflation. In addition, policy influence tends to be low as the short end becomes segmented toward medium/long-term of the yield curve. Furthermore, volatility in bond markets is found to be asymmetrically affected by positive and negative shocks and long end tends to be less sensitive to stochastic shocks than the short maturities. The expectation hypothesis of the term structure does not hold during the ZIRP period.

Original languageEnglish
Pages (from-to)546-572
Number of pages27
JournalJournal of Applied Statistics
Volume41
Issue number3
DOIs
Publication statusPublished - 2014 Mar 1

Keywords

  • EGARCH
  • curvature
  • expectation channel
  • latent factors
  • monetary policy transmission
  • state-space model
  • term structure

ASJC Scopus subject areas

  • Statistics and Probability
  • Statistics, Probability and Uncertainty

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