No. 160. Why Are Long Rates Sensitive to Monetary Policy

by Tore Ellingsen and Ulf Söderström

Abstract: We use a quantitative model of the U.S. economy to analyze the response of long-term interest rates to monetary policy, and compare the model results with empirical evidence. We find that the strong and time-varying yield curve response to monetary policy innovations found in the data can be explained by the model. A key ingredient in explaining the yield curve response is central bank private information about the state of the economy or about its own target for inflation.

Keywords: Term structure of interest rates, yield curve, central bank private
information, excess sensitivity.

JEL Classification: E43, E52.