## Equilibrium Yield Curve, the Phillips Curve, and Monetary Policy

_IMF Working Papers, November 9, 2018_

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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

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### 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.

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## Content in this bundle

- **Equilibrium Yield Curve, the Phillips Curve, and Monetary Policy, WP/18/242, November 2018**
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_Source: https://www.imf.org/en/publications/wp/issues/2018/11/09/equilibrium-yield-curve-the-phillips-curve-and-monetary-policy-46325_