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Agnello, Luca
Year of Publication: 
Series/Report no.: 
Quaderni di Dipartimento - EPMQ 194
This paper is concerned with the question whether, over the last two decades, the priority to maintain the credibility as inflation 'fighter' induced the Fed to conduct a monetary policy that can be considered asymmetric in nature. Considering that the longer-term bond interest rate is the most reliable indicator used to gauge Fed's credibility to low inflation, we investigate the equilibrium-type relationship between the monetary policy instrument, the Federal Funds rate, and 10-year government bond rate within a threshold-cointegration framework in a similar fashion of Enders and Siklos (2001). Our empirical findings indicate that, during the period 1980-2005, both the direction and magnitude of changes in long-term expected inflation, reflected in 10-year bond rate movements, influenced the timing of the Fed's action. Therefore, we conclude that asymmetries in the term-spread dynamics are the result of the Fed's behaviour that can be considered representative of a monetary policy essentially asymmetric.
Document Type: 
Working Paper

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