Term Structure Transmission of Monetary Policy (Why Bond Traders are Paid More than Central Bankers)

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