Discussion Paper Series 2004-E-2

The Term Structure of Interest Rates and Monetary Policy During a Zero-Interest-Rate Period

Jun Nagayasu

Applying a time-series method to high-frequency Japanese data, this paper empirically evaluates the validity of the term structure of interest rates in a lowinterest-rate environment. Our empirical results suggest that, when interest rates are low and the short-end of the term structure is studied, there is no evidence to support the standard term-structure relationship. This poor performance is attributed to little information in the interest rate spread that can be used for predicting future economic activity andor to the absence of the persistent term premium. In contrast, some evidence for the term-structure relationship is found when the long-end of the term structure data is considered during a relatively high interest rate period.

Keywords: Monetary policy; Zero interest rates

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2004 Bank of Japan All Rights Reserved.

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