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Article: Using the term structure of interest rates for monetary policy.
- Article from:
- Economic Quarterly
- Article date:
- June 22, 1998
- Author:
CopyrightCOPYRIGHT 1998 Federal Reserve Bank of Richmond. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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The term structure of interest rates, i.e., the yield curve, has long been of interest to monetary policymakers and their advisers. The transmission of monetary policy is conventionally viewed as running from short-term interest rates managed by central banks to longer-term rates that influence aggregate demand. A central bank's leverage over longer-term rates comes from the fact that the market determines these as the average expected level of short rates over the relevant horizon (abstracting from a term premium and default risk). Working in the other direction, the long bond rate contains a premium for expected inflation and, thus, serves as an indicator of the ...