Yield Curve Rotations, Monetary Shocks, and Greenspan's Conundrum

dc.contributor.ORCID0000-0002-6642-3239 (Valcarcel, VJ)
dc.contributor.authorValcarcel, Victor J.
dc.contributor.utdAuthorValcarcel, Victor J.
dc.date.accessioned2020-08-03T17:41:24Z
dc.date.available2020-08-03T17:41:24Z
dc.date.issued2019-02-26
dc.description.abstractBetween June 2004 and December 2005 the Federal Reserve conducted a relatively aggressive contractionary policy that saw a steady increase in the effective federal funds rate of over 300 basis points. Yet the 10-year treasury rate fluctuated little over 60 basis points and ultimately declined slightly over the period. This was dubbed Greenspan's Conundrum after a famous speech by the former chairperson in February 2005. This highlights the importance of understanding the efficacy with which the central bank may impact term premia through changes in the short-term rate. I find hikes in interest rates lead to reductions in rate spreads at first, before turning positive roughly about a year post shock. These findings are statistically significant for a variety of interest rate spreads over two different samples. Following a contractionary monetary policy action, the yield curve experiences a clockwise tilt at first and an eventual counterclockwise rotation after some delay. A counterfactual analysis suggests that augmenting the federal funds rate hike of 2004 with a similar action to the Fed's 2011 Operation Twist-but conducive to contraction rather than expansion-could have mitigated Greenspan's Conundrum of 2004-2005.
dc.description.departmentSchool of Economic, Political and Policy Sciences
dc.identifier.bibliographicCitationValcarcel, Victor J.. 2019. "Yield curve rotations, monetary shocks, and Greenspan's Conundrum." Quantitative Finance and Economics 3(1): 1-21, doi: 10.3934/QFE.2019.1.1
dc.identifier.issn2573-0134
dc.identifier.issue1
dc.identifier.urihttp://dx.doi.org/10.3934/QFE.2019.1.1
dc.identifier.urihttps://hdl.handle.net/10735.1/8767
dc.identifier.volume3
dc.language.isoen
dc.publisherAmerican Institute of Mathematical Sciences
dc.rightsCC BY 4.0 (Attribution)
dc.rights©2019 The Author, AIMS Press licensee
dc.rights.urihttp://creativecommons.org/licenses/by/4.0/
dc.source.journalQuantitative Finance and Economics
dc.subjectMonetary policy
dc.subjectInterest rates
dc.subjectBusiness
dc.subjectGreenspan, Alan, 1926-
dc.subjectEconomics
dc.titleYield Curve Rotations, Monetary Shocks, and Greenspan's Conundrum
dc.type.genrearticle

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