Marcelo Ferman

Ph.D. Student
London School of Economics - Department of Economics

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In this paper I propose a regime-switching approach to explain why the U.S. nominal yield curve on average has been steeper since the mid-1980s than during the Great Inflation of the 1970s. I show that, once the possibility of regime switches in the short-rate process is incorporated into investors' beliefs, the average slope of the yield curve generally will contain a new component called 'level risk'. Level-risk estimates, based on a Markov-Switching VAR model of the U.S. economy, are then provided. I find that the level risk was large and negative during the Great Inflation, reflecting a possible switch to lower short-rate levels in the future. Since the mid-1980s the level risk has been moderate and positive, reflecting a small but still relevant possibility of a return to the regime of the 1970s. I replicate these results in a Markov-Switching dynamic general equilibrium model, where the monetary policy rule followed by the Fed shifts between an active and a passive regime. The model also explains why in recent decades the U.S. yield curve on average has been steeper than the yield curve in countries that adopted explicit inflation targeting frameworks. This paper develops a DSGE model in which banks use short term deposits to provide firms with long-term credit. The demand for long-term credit arises because firms borrow in order to finance their capital stock which they only adjust at infrequent intervals. We show within an RBC framework that maturity transformation in the banking sector in general attenuates the output response to a technological shock. Implications of long-term nominal contracts are also examined in a New Keynesian version of the model, where we find that maturity transformation reduces the real effects of a monetary policy shock. In this paper I analyze how exogenous monetary policy impulses transmit jointly to the U.S. macroeconomy and the term structure of U.S. interest rates. I estimate a Macro-Affine Term Structure Model, which is similar to Joslin,Priebsch and Singleton (2010), and use it to identify monetary policy shocks and term premia. My main finding is that monetary policy shocks trigger relevant movements in long-term bond premia, which in turn feed back into the macroeconomy. This gives rise to a "term-premium channel of monetary transmission". I show that it is particularly important in the pre-Volcker period; in the post-Volcker period, this channel turns out to be empirically irrelevant. I then estimate how shocks to future monetary policy expectations are transmitted to the economy. I find that, in the post-Volcker period, shocks to policy expectations produce more pronounced and more intuitive responses for macroeconomic variables than do standard shocks to the contemporaneous value of the monetary policy instrument. This suggestes that communication between the Fed and private agents is a powerful instrument of monetary policy.