Term Structure Transmission of Monetary Policy
(Why Bond Traders Are Paid More Than Central Bankers)
By Sharon Kozicki and P.A. Tinsley

first draft: July 28, 2005
version: December 6, 2005 
RWP 05-06
Research Division 
Federal Reserve Bank of Kansas City 

Abstract

      The sensitivity of bond rates to macro variables appears to vary both over time and over forecast horizons.  The latter may be due to differences in forward rate term premiums and in bond trader perceptions of anticipated policy responses at different forecast horizons.  Determinacy of policy transmission through bond rates requires a lower bound on the average responsiveness of term premiums and anticipated policy responses to inflation.

Keywords: Asymmetric information; no-arbitrage term structure; the Great Inflation; the Taylor Principle.

JEL classification: E3, E5, N1

*Authors’ addresses are Vice President and Economist, Research Department, Federal Reserve Bank of Kansas City, 925 Grand Boulevard, Kansas City, MO, 64198, USA, sharon.kozicki@kc.frb.org; and Visitor, Department of Economics, George Washington University, 3840 Beecher St., NW, Washington, DC 20007, USA, ptinsley@gwu.edu. Views expressed are those of the authors and do not necessarily represent those of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

Back to top       RWP home