Anna Florio

Term Structure and Interest Rate Stabilization Policies: New Evidence

Previous studies impute the failure of the expectations theory, using 6 and 3-month Treasury bill spread, to the Fed.s commitment to stabilize interest rates.We get that from Greenspan tenure on, that spread predicts future changes in the short rate in the United States. This success is ascribed to improved interest rates predictability achieved by the Fed which, as well as enhancing the management of market expectations, has reduced uncertainty acquiring credibility form the market (now asking for lower term premia).

The central bank as shaper and observer of events: The case of the yield spread

The yield spread has commonly been employed as a successful predictor of economic growth and recessions, although its marginal predictive power has decreased since the 1990s. Notably, the yield spreads declining power to predict US economic activity coincided with its growing power to predict US interest rate changes. In my view, these phenomena are inevitably linked and share one cause. The central bank intended to enhance both its transparency and credibility through greater information disclosure; this disclosure improved interest rate predictability but might also have crowded out useful private information formerly in the yield spread that helped predict economic activity.

Asymmetric Preferences For Interest Rate Variability And Non-Linear Monetary Policy Inertia

Introducing in a central bank loss function asymmetric preferences for interest rate stabilization together with a (symmetric) smoothing goal could lead to asymmetric interest rate smoothing. An empirical analysis supports this theoretical result and finds for the disinflation (Volcker) period a more cautious adjustment of interest rates downwards than upwards, and for the ‘price stability’ (Greenspan) period a more inertial behaviour in the opposite direction.