IMF Working Papers

Equilibrium Yield Curve, the Phillips Curve, and Monetary Policy

By Mitsuru Katagiri

November 9, 2018

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Mitsuru Katagiri. Equilibrium Yield Curve, the Phillips Curve, and Monetary Policy, (USA: International Monetary Fund, 2018) accessed November 8, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Financial services, Inflation, Long term interest rates, National accounts, Personal income, Prices, Short term interest rates, Yield curve

Keywords: Business cycle, Consumption growth, Equilibrium yield curve, Inflation, Inflation gap, Inflation process, Long term interest rates, Low-for-long, Monetary policy, Nominal interest rate, Personal income, Phillips curve, Short term interest rates, Term premium, Term premiums, Trend inflation, WP, Yield curve

Publication Details

  • Pages:

    42

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2018/242

  • Stock No:

    WPIEA2018242

  • ISBN:

    9781484382370

  • ISSN:

    1018-5941

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