Asymmetric Monetary Policy Rules and the Yield Curve

Abstract

Simple models of central bank behavior can produce highly complex yield curve shapes. Using the Taylor rule and its extensions as building blocks, we construct a robust framework for generating realistic yield curves and the evolution of the economy. Our main focus is the impact on the yield curve and the economy of asymmetrically accomodative policy, typically called the "deflation put." We find that for economies like the U.S. the deflation put reduces yields for all maturities. We also find that in highly leveraged economies (such as Japan) the consequence of an asymmetric deflation fighting policy may result in improved economic conditions, but also raises the possibility of higher long term yields as a consequence.

Keywords: Yield Curve, Monetary Policy

JEL Classification: G1, E4, E5