Staff Working Paper No. 914
By Iryna Kaminska, Haroon Mumtaz and Roman Sustek
Monetary policy moves the yield curve. How much is due to expected interest rates versus term premia? And does it matter for macroeconomic outcomes? Using an affine term structure model, we shed new light on these questions. Estimation is subject to restrictions addressing estimation bias in expected interest rates obtained by previous studies. High-frequency yield curve decompositions around FOMC announcements into term premia and expected interest rates then provides instruments for a local projection model. The effects of interest rate expectations and term premia are found equally important for the transmission mechanism and broadly consistent with macroeconomic theory.