() and Ulf Söderström
Tore Ellingsen: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden
Ulf Söderström: Research Department, Sveriges Riksbank, Postal: SE-103 37 Stockholm, Sweden
Abstract: We investigate, theoretically and empirically, the relationship between monetary policy and the term structure of interest rates. In particular, we show in a dynamic macroeconomic model that if monetary policy reveals information about economic developments, interest rates of all maturities move in the same direction in response to a policy innovation. If, on the other hand, monetary policy reveals information about the central bank's policy preferences, short and long interest rates move in opposite directions. In the empirical section, we provide direct measures of endogenous and exogenous monetary policy innovations in the U.S. by analyzing the reaction of financial market participants to Federal Reserve policy moves. The empirical findings support the theoretical predictions.
47 pages, First version: May 28, 1998. Revised: March 8, 1999. Earlier revisions: March 8, 1999, March 8, 1999.
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