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U.S. Monetary Policy Surprises: Identification with Shifts and Rotations in the Term Structure
Author(s) -
CLAUS EDDA,
DUNGEY MARDI
Publication year - 2012
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2012.00539.x
Subject(s) - yield curve , monetary policy , term (time) , economics , shock (circulatory) , identification (biology) , econometrics , affine term structure model , monetary economics , interest rate , maturity (psychological) , heteroscedasticity , psychology , physics , biology , medicine , developmental psychology , botany , quantum mechanics
We develop a model to extract measures of monetary policy surprises from the maturity structure of the yield curve. The model endogenously allows for the fact that the yield curve may either shift or rotate in response to monetary policy shocks. A latent factor model approach with identification through heteroskedasticity harnesses the term structure to extract monetary policy shocks. The approach offers informational advantages over event studies. Results from the U.S. term structure from 1994 strongly support the hypothesis that differing term structure responses are reactions to different types of monetary policy shock, rather than differing reactions to the same policy shock.