This paper reviews alternative options for monetary policy when the short-term interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates. We use a model of risk-averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level, slope and curvature term-structure risk. We find these Treasury factors historically were quite helpful for predicting both yields and excess returns over 1990-2007. The historical correlations are consistent with the claim that if the Fed were to sell off all its Treasury holdings of less than one-year maturity and use the proceeds to retire Treasury debt from the long end, on average over the 1990-2007 period this might have resulted in a 14-basis-point drop in the 10-year rate and an 11-basis-point increase in the 6-month rate. We also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009. Our estimates imply that at the zero lower bound, the policy would have the same potential to lower long-term yields without raising short-term yields.

We investigate the extent to which inflation expectations have been more firmly anchored in the United Kingdom—a country with an explicit inflation target—than in the United States—which has no such target—using the difference between far-ahead forward rates on nominal and inflationindexed bonds as a measure of compensation for expected inflation and inflation risk at long horizons. We show that far-ahead forward inflation compensation in the U.S. exhibits substantial volatility, especially at low frequencies, and displays a highly significant degree of sensitivity to economic news. Similar patterns are evident in the U.K. prior to 1997, when the Bank of England was not independent, but have been strikingly absent since the Bank of England gained independence in 1997. Our findings are further supported by comparisons of dispersion in longerrun inflation expectations of professional forecasters and by evidence from Sweden, another inflation targeting country with a relatively long history of inflation-indexed bonds. Our results support the view that an explicit and credible inflation target helps to anchor the private sector’s

The term structure of euro area break-even inflation rates the impact of seasonality 1 by Jacob Ejsing,

Using a panel of daily CUSIP-level data, we study the effects of the Federal Reserve’s program to purchase $300 billion of U.S. Treasury coupon securities announced and implemented during 2009. This program represented an unprecedented intervention in the Treasury market and thus allows us to shed light on the price elasticities and substitutability of Treasuries, as well as on the ability of large-scale asset purchases to reduce overall yields and improve market functioning. We find that each purchase operation, on average, caused a temporary decline in yields in the sector purchased on the order of 4 basis points (the “flow effect ” of the program). In addition, the program as a whole resulted in a persistent downward shift in the yield curve of as much as 45 basis points, with the largest impact in the 10- to 15year sector (the “stock effect”). Contact:

In 2007 all ECB publications feature a motif taken from the 20 banknote. This paper can be downloaded without charge from

In response to the global financial crisis that started in August 2007, central banks provided extraordinary amounts of liquidity to the financial system. To investigate the effect of central bank liquidity facilities on term interbank lending rates, we estimate a six-factor arbitrage-free model of U.S. Treasury yields, financial corporate bond yields, and term interbank rates. This model can account for fluctuations in the term structure of credit risk and liquidity risk. A significant shift in model estimates after the announcement of the liquidity facilities suggests that these central bank actions did help lower the liquidity premium in term interbank rates. We thank conference participants at the Federal Reserve Bank of New York, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Bank of England, Köc University, and the Federal Reserve Bank of San Francisco—and especially, Pierre Collin-Dufresne and Simon Potter—for helpful comments. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of

Linearized New Keynesian models and empirical no-arbitrage macro-finance models offer little insight regarding the implications of changes in bond term premiums for economic activity. This paper investigates these implications using both a structural model and a reduced-form framework. The authors show that there is no structural relationship running from the term premium to economic activity, but a reduced-form empirical analysis does suggest that a decline in the term premium has typically been associated with stimulus to real economic activity, which contradicts earlier results in the literature.

Differences between yields on comparable-maturity U.S. Treasury nominal and real debt, the so-called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums from the BEI rates. We provide such decompositions using an estimated affine arbitrage-free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long-term inflation expectations have been well anchored over the past few years, and inflation risk premiums, although volatile, have been close to zero on average. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. Draft date: December 8, 2008. From the perspective of monetary policy, just as important as the behavior of actual inflation is what households and businesses expect to happen to inflation in the future, particularly over the longer term. If people expect an increase in inflation to be temporary and do not build it into their longer-term plans for setting wages and prices, then the inflation created by a shock to oil prices will tend to fade relatively quickly. Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the

andUniversityofMinnesota We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the short rate. Our findings imply that standard monetary models miss an essential link between the central bank instrument and the economic activity that monetary policy is intended to affect, and thus we call for a new approach to monetary policy analysis. We sketch a new approach using an economic model based on our pricing kernel. The model incorporates the key relationships between policy and risk movements in an unconventional way: the central bank’s policy changes are viewed as primarily intended to compensate for exogenous business cycle fluctuations in risk that threaten to push inflation off target. This model, while an improvement over standard models, is considered just a starting point for their revision. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Modern models of monetary policy start from the assumption that the central bank controls an asset price, namely, the short rate, as its policy instrument. In these models, this

This paper provides cross-country empirical evidence on bond risk premia. I construct a panel of zero-coupon nominal government bond yields spanning ten industrialized countries and nearly two decades. I hence compute forward rates and then use two different methods to decompose these forward rates into expected future short-term interest rates and term premiums. The first method uses an affine term structure model with macroeconomic variables as unspanned risk factors; the second method uses surveys. I find that term premium estimates declined across countries over the sample period, especially in countries that appear to have reduced inflation uncertainty by making substantial changes in the monetary policy frameworks of their central banks. During the recent financial crisis, term premiums have remained flat and even declined further in some countries, perhaps reflecting the effects of quantitative easing actions by many central banks.