Monetary Policy, Forward Rates and Long Rates: Does Germany Differ from the United States?

CEPR Discussion Paper Series No. 1456

Posted: 17 Mar 1997

See all articles by Marco Pifferi

Marco Pifferi

London School of Economics & Political Science (LSE)

Fabrizio Iacone

London School of Economics & Political Science (LSE) - Department of Economics

Carlo A. Favero

Bocconi University - Department of Economics; Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 1996

Abstract

In this paper we analyse the impact of monetary policy shocks on the term structure of interest rates in US and Germany. We estimate the term structure of spot rates and of the instantaneous forward rate following the methodology proposed by Svensson (1994). We interpret the instantaneous forward rate as the expectations for the overnight rate prevailing at each point in the future. Exploiting the fact that intervention on policy rates take place in occasion of regular meetings of the FOMC in the US and of the Bundesbank Council in Germany, we estimate the term structure of spot rates and of instantaneous forward rates the day before and the day after regular meetings. From the estimation of the term structures before meetings we derive a measure of expectations for Central Banks interventions. On this basis we can assess the predictability of monetary policy under the null of the validity of the pure expectational model. We perform this exercise both by regression analysis and by the implementation of a non-parametric test proposed by Pesaran and Timmermann (1990). We then proceed to derive a measure of policy shocks by using information on the effective intervention. Such measure of policy shocks is available both for dates in which some intervention was effectively implemented by Central Banks and for dates in which a policy of no intervention was decided. Finally, we evaluate the impact of monetary policy on the term structure of interest rates by regressing the change in the yield curve between the day before and the day after meetings on expected and unexpected modification in policy rates. We conduct such exercise for the US and Germany over the period 1991-1995 to evaluate the sign and the magnitude of the response of the term structures in the two countries to expected and unexpected modifications in monetary policy.

JEL Classification: E43, E52

Suggested Citation

Pifferi, Marco and Iacone, Fabrizio and Favero, Carlo A., Monetary Policy, Forward Rates and Long Rates: Does Germany Differ from the United States? (September 1996). CEPR Discussion Paper Series No. 1456, Available at SSRN: https://ssrn.com/abstract=3805

Marco Pifferi (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Fabrizio Iacone

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Carlo A. Favero

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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