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Dynamics Of The Term Structure Of UK Interest Rates

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Executive Summary

This paper models the evolution of monetary policy, the term structure of interest rates and the UK economy across policy regimes. The authors model the interaction between the macro economy and the term structure using a time-varying VAR model augmented with the factors from the yield curve. The results suggest that the level, slope and curvature factors display substantial time variation, with the level factor moving closely with measures of inflation expectations. The estimates indicate a large decline in the volatility of both yield curve and macroeconomic variables around 1992, when the United Kingdom first adopted an inflation-targeting regime.

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