Finance and Economics Discussion Series (FEDS)
October 2007
Cracking the Conundrum
David Backus and Jonathan H. Wright
Abstract:
From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25 percentage points, yet long-maturity yields and forward rates fell. We consider several possible explanations for this "conundrum." The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic uncertainty and financial market volatility, more predictable monetary policy, and the state of the business cycle.
Full Paper (Screen Reader Version)Keywords: Yield curve, forward rates, volatility, term premium, affine models, monetary policy
PDF: Full Paper
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