Abstract
In this paper we study the joint behavior of the federal funds rate and 10-year TIPS yields before the start of the financial crisis in 2007. We make three points. First, the decade before the crisis was characterized by a collapse in the yield on TIPS. Second, estimated VARs for the federal funds rate and the TIPS yield show that while monetary policy shocks had negligible effects on the TIPS yield, shocks to the latter had one-to-one effects on the federal funds rate. Third, these findings can be rationalized in a New Keynesian model.
Acknowledgments
We are grateful to Pooyan Amir Ahmadi, Petra Gerlach, François Gourio, Vivien Lewis and Maik Wolters, participants in the Conference in honor of Paul De Grauwe held at the KU Leuven on November 17–18, 2011 and an anonymous referee for comments. The views expressed here are solely those of the authors.
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