Equilibrium Yield Curve, the Phillips Curve, and Monetary Policy
IMF Working Papers, November 9, 2018
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- Equilibrium Yield Curve, the Phillips Curve, and Monetary Policy
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Bibliographic details
- Authors: Mitsuru Katagiri
- Published: November 9, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484382370.001
Main finding
- 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, the paper shows:
- Inflation is negatively correlated with long-run income growth.
- Inflation is positively correlated with cyclical income.
- These relationships enable the model to replicate positive and sizable term premiums, along with the Phillips curve over business cycles.
Quantitative analysis and scenarios
- Quantitative analyses emphasize the importance of monetary policy.
- The model predicts 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.
Policy implications and recommendations
- Monetary policy plays a critical role in shaping the term structure of interest rates through its interaction with growth and inflation dynamics.
- Persistent low growth and low inflation environments increase the risk of constrained policy effectiveness at the zero lower bound, which in turn flattens yield curves and reduces term premiums.
Content in this bundle
- Equilibrium Yield Curve, the Phillips Curve, and Monetary Policy, WP/18/242, November 2018