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Title: An analysis of monetary policy transmission through bond yields
Author: Lloyd, Simon Phillip
ISNI:       0000 0004 7225 2856
Awarding Body: University of Cambridge
Current Institution: University of Cambridge
Date of Award: 2017
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In this thesis, I study the transmission of monetary policy through the term structure of interest rates. This is an important topic because, with short-term nominal interest rates in many advanced economies close to their effective lower bound since 2008-2009, central banks have used `unconventional' monetary policies, such as large-scale asset purchases and forward guidance, to stimulate macroeconomic activity by, inter alia, placing downward pressure on longer-term interest rates. I focus on the mechanisms through which monetary policy influences bond yields, domestically and globally, with reference to a canonical decomposition of longer-term interest rates into expectations of future short-term interest rates, and term premia. After an introduction in chapter 1, chapter 2 appraises the use of overnight indexed swap (OIS) rates as measures of expected future monetary policy. Unlike federal funds futures (FFFs), which have regularly been used to construct measures of US interest rate expectations, OIS rates are available in many countries. I find that US OIS rates provide measures of interest rate expectations that are as good as those from FFFs, and that US, UK, Eurozone and Japanese OIS rates up to a 2-year horizon tend to accurately measure interest rate expectations, providing comparable cross-country measures of monetary policy expectations. In chapter 3, I propose a novel method for estimating interest rate expectations and term premia at short and long-term horizons: a no-arbitrage Gaussian affine dynamic term structure model (GADTSM) augmented with OIS rates. Using 3 to 24-month OIS rates, the OIS-augmented model generates estimates of the expected path of short-term interest rates out to a 10-year horizon that closely correspond to those implied by FFFs rates and survey expectations, outperforming existing GADTSMs. I study the transmission of US unconventional monetary policies in chapter 4. Using the OIS-augmented GADTSM, I carry out an event study to demonstrate that US unconventional monetary policy announcements between November 2008 and April 2013 did significantly reduce US longer-term interest rates by affecting expectations and term premia. As a result of these declines, unconventional monetary policies aided US real economic outcomes. Using a structural vector autoregression, I show that changes in interest rate expectations, linked to monetary policy signalling, had more expansionary effects on US real economic outcomes than changes in term premia, associated with portfolio rebalancing. Chapter 5 assesses the international transmission of monetary policy through the term structure of interest rates between advanced economies. I present a micro-founded, two-country model with endogenous portfolio choice amongst country-specific short and long-term bonds, and equity. Within the model, US monetary policy has sizeable effects on longer-term interest rates in other advanced economies, which are similar to empirical estimates. Using the OIS-augmented GADTSM in an event study, I show that US monetary policy has led to changes in interest rate expectations in other advanced economies that amplify global spillovers, which have been partly mitigated by changes in term premia through portfolio rebalancing.
Supervisor: Geraats, Petra Maria Sponsor: Economic and Social Research Council
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
Keywords: Dynamic Term Structure Model ; Global Spillovers ; International Portfolios ; Monetary Policy Expectations ; Overnight Indexed Swaps ; Term Premia ; Term Structure of Interest Rates ; Unconventional Monetary Policy ; Yield Curve