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Asymmetric monetary policy and the yield curve

Bhansali, Vineer and Dorsten, Matthew P. and Wise, Mark B. (2009) Asymmetric monetary policy and the yield curve. Journal of International Money and Finance, 28 (8). pp. 1408-1425. ISSN 0261-5606. https://resolver.caltech.edu/CaltechAUTHORS:20100503-151247477

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Abstract

We discuss the Taylor rule near low inflation and interest rates. Using an additional option-like term in the Federal Reserve’s loss function (i.e., the ‘‘deflation put’’) we extend the classic Taylor rule to one with an asymmetric response that is more accommodative when the inflation rate is very low. Once calibrated, this payoff profile gives an exact, and easily communicable prescription for Federal Reserve policy under regimes of low inflation. Simple models of central bank behavior can produce highly complex yield curve shapes. Using the usual Taylor rule and our proposed extension 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 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 longterm yields as a consequence.


Item Type:Article
Related URLs:
URLURL TypeDescription
http://dx.doi.org/10.1016/j.jimonfin.2009.09.001DOIUNSPECIFIED
Additional Information:© 2009 Elsevier Ltd. Available online 8 September 2009. This article contains the current opinions of the authors and not necessarily Pacific Investment Management Company LLC. These opinions are subject to change without notice. This article is distributed for educational purposes only and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed reliable, but not guaranteed. No part of this presentation may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 2005, PIMCO.
Subject Keywords:Taylor rule; Monetary policy
Issue or Number:8
Classification Code:JEL classification: E5 Monetary policy, Central Banking, and the Supply of Money and Credit
Record Number:CaltechAUTHORS:20100503-151247477
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20100503-151247477
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:18118
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:07 May 2010 16:56
Last Modified:03 Oct 2019 01:38

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