Networking the Yield Curve: Implications for Monetary Policy
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Date
2021-05-06
Journal Title
Journal ISSN
Volume Title
Publisher
Private Enterprise Research Center, Texas A&M University
Abstract
In this working paper, authors Tatevik Sekhposyan, Tatjana Dahlhaus, and Julia Schaumburg introduce a flexible, time-varying network model to trace the propagation of interest rate surprises across different maturities. First, the authors develop a novel econometric framework that allows for unknown, potentially asymmetric contemporaneous spillovers across panel units, and establish the finite sample properties of the model via simulations. Second, this innovative framework is employed to jointly model the dynamics of interest rate surprises and to assess how various monetary policy actions, for example, short-term, long-term interest rate targeting and forward guidance, propagate across the yield curve. Findings show that the network of interest rate surprises is indeed asymmetric, and defined by spillovers between adjacent maturities. Spillover intensity is high, on average, but shows strong time variation. Forward guidance is an important driver of the spillover intensity. Pass-through from short-term interest rate surprises to longer maturities is muted, yet there are stronger spillovers associated with surprises at medium- and long-term maturities. The authors illustrate how our proposed framework helps our understanding of the ways various dimensions of monetary policy propagate through the yield curve and interact with each other.
Description
PublicFinance
Keywords
Dynamic networks, Monetary policy, Yield curve, Yield-curve targeting, Forward guidance, PublicFinance