Monetary surprises and term structure of interest rates: Identification through heteroscedasticity

Viacheslav Kramkov and Andrey Maksimov ()
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Andrey Maksimov: HSE University, Nizhny Novgorod, Russian Federation;

Applied Econometrics, 2024, vol. 74, 5-34

Abstract: How does an unexpected change in the Bank of Russia key rate affect the bond market? This article quantifies the impact of monetary surprises on government bond yields of various maturities. To estimate the causal effect with the joint dynamics of the key rate and bond yields (that is, to solve the problem of endogenous bias), we use the heteroscedasticity-driven identification method that requires weaker assumptions than other alternative methods used in the literature. The results confirm the significant impact of monetary policy surprises on the interest rate term structure, with a greater effect on short-term rates. In contrast to previous studies, the behavior of long-term rates is consistent with the expectations hypothesis: risk premia do not respond significantly to a monetary shock.

Keywords: identification through heteroskedasticity; instrumental variables; monetary shocks; term structure of interest rates; Bank of Russia monetary policy. (search for similar items in EconPapers)
JEL-codes: C26 C51 E43 E44 E52 E58 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:ris:apltrx:0495

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