Equilibrium Yield Curve, the Phillips Curve, and Monetary Policy
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Summary:
Upward sloping yield curves are hard to reconcile with the positive association between income and inflation (the Phillips curve) in consumption-based asset pricing models. Using US and UK data, this paper shows inflation is negatively correlated with long-run income growth but positively correlated with cyclical income, thus enabling the model to replicate positive and sizable term premiums, along with the Phillips curve over business cycles. Quantitative analyses also emphasize the importance of monetary policy, predicting that a permanently low growth and low inflation environment would precipitate flatter yield curves due to constraints to monetary policy around the zero lower bound.
Series:
Working Paper No. 2018/242
Subject:
Financial services Inflation Long term interest rates National accounts Personal income Prices Short term interest rates Yield curve
English
Publication Date:
November 9, 2018
ISBN/ISSN:
9781484382370/1018-5941
Stock No:
WPIEA2018242
Pages:
42
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