Term structure transmission of monetary policy

Under bond-rate transmission of monetary policy, the authors of this Bank of Canada Working Paper show that a generalized Taylor Principle applies, in which the average anticipated path of policy responses to inflation is subject to a lower bound of unity.

This result helps explain how bond rates may exhibit stable responses to inflation, even in periods of passive policy. Another possible explanation is time-varying term premiums with risk pricing that depends on inflation. The authors

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