Monetary Policy and Interest Rate Factors

Abstract

Previous research establishes the stylized fact that bond returns differ across monetary policy regimes. Specifically, bond returns are higher (lower) and exhibit lower (higher) standard deviations during expan-sive (restrictive) policy periods. Using the three factors known to explain bond returns, we find that the level and slope factors drive the pattern documented in the literature. We find, however, that this pattern is not present in recent data. Our results suggest that either the linkage between monetary policy and bond returns changed or that the association documented in the extant literature arose spuriously.