| This paper studies the effect of monetary policy on bond yields using the narrative shocks derived from the work of Romer and Romer (AER, 2004). Monetary shocks are orthogonalized against authorities' forward-looking behaviors, thereby capturing the true monetary effect on the economy. The challenge in empirical studies examining monetary policy is how to develop a measure that can accurately distinguish the endogenous policy movements from the exogenous monetary shocks.;By employing the monetary shocks derived from the work of Romer and Romer (AER, 2004), this study shows that although monetary effect on the bond yields is transitory, its influences on the bond yields can last longer than previous studies have argued. Empirical evidence also indicates that (1) a negative (expansionary) shock has a stronger effect on the bond yields than a positive (contractionary) shock does; (2) a larger shock has a greater influence on the bond yield than a smaller shock does; and (3) a shock during a recession carries more weight than a shock during expansions. These results support the arguments put forth in interest rate channel of monetary policy and asymmetry properties of bond reactions. |
