Synopses - CENTRAL BANK TARGET RATES AND TERM STRUCTURE OF INTEREST RATES: A STUDY OF SIX ASIA-PACIFIC COUNTRIES

Summary Understanding the factors determining overnight rates is crucial both for central bankers and private market participants, since, assuming the validity of the expectation theory of the term structure of interest rates, expectations with regard to this “monadic” maturity should determine longer term rates, which are deemed to be relevant for the transmission of monetary policy. The note proposes a simple model of the money market within a two-day long reserve maintenance period to derive relationships between the relevant quantities, expectations concerning these quantities for the rest of the reserve maintenance period, and overnight rates. It is argued that a signal extraction problem faced by banks when observing quantities such as their aggregate reserve holdings and allotment amounts of monetary policy operations is at the core of these relationships. The usefulness of the model is illustrated by applying it to the analysis of three alternative liquidity management strategies of a central bank.

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The Link between German Short- and Long-Term Interest Rates. Some Evidence against a Term Structure Oriented Monetary Policy / Der Zusammenhang zwischen kurz- und langfristigen Zinssätzen in Deutschland. Empirische Evidenz gegen eine zinsstrukturorientierte Geldpolitik

Jahrbücher für Nationalökonomie und Statistik ◽

10.1515/jbnst-1998-0204 ◽

1998 ◽

Vol 217 (2) ◽

Cited By ~ 2

Author(s):

Uwe Hassler ◽

Dieter Nautz

Keyword(s):

Monetary Policy ◽

Central Bank ◽

Interest Rates ◽

Term Structure ◽

Monetary Union ◽

Stable Relationship ◽

Monetary Targeting ◽

Main Indicator ◽

Short And Long Term

SummaryCritics of the Bundesbank's monetary policy recently suggested the abandonment of monetary targeting in favour of the term structure of interest rates as the main indicator of central bank policy. However, a term structure oriented policy requires a reliable link between short- and long-term interest rates. Our analysis clearly suggests that there is no stable relationship between German short- and long-term interest rates, in particular not after the German monetary union. Consequently, the empirical results of this paper indicate that this policy has not much chance of success.

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The term structure of interest rates and inflation forecast targeting

South African Journal of Economic and Management Sciences ◽

10.4102/sajems.v12i2.274 ◽

2011 ◽

Vol 12 (2) ◽

pp. 162-179

Author(s):

Eric Schaling ◽

Willem Verhagen ◽

Sylvester Eiffinger

Keyword(s):

Interest Rate ◽

Central Bank ◽

Interest Rates ◽

Term Structure ◽

Inflation Targeting ◽

Nominal Interest Rate ◽

Term Spread ◽

State Of The Economy ◽

Output Persistence

This paper examines the implications of the expectations theory of the term structure of interest rates for the implementation of inflation targeting. We show that the responsiveness of the central bank’s instrument to the underlying state of the economy is increasing in the duration of the long-term bond. On the other hand, an increase in duration will make long-term inflationary expectations - and therefore also the long-term nominal interest rate - less responsive to the state of the economy. The extent to which the central bank is concerned with output stabilisation will exert a moderating influence on the central bank’s response to leading indicators of future inflation. However, the effect of an increase in this parameter on the long-term nominal interest rate turns out to be ambiguous. Next, we show that both the sensitivity of the nominal term spread to economic fundamentals and the extent to which the spread predicts future output, are increasing in the duration of the long bond and the degree of structural output persistence. However, if the central bank becomes relatively less concerned about inflation stabilisation the term spread will be less successful in predicting real economic activity.

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