Monetary Policy Shocks and the Term Structure of Bond Yield: A SVAR Analysis of Malaysia

Abstract

This chapter examines the impact of monetary policy shocks (domestic and foreign) and oil price shocks on bond yield movement across the term structure. Indicators of monetary policies used were overnight interbank rate (IBOR) for domestic monetary policy and federal funds rate (FFR) for foreign monetary policy. In contrast, bond yield data was from the index of the bond yield of three−year, five−year, and ten−year maturity rates. The exogenous shocks have generated using structural vector autoregressive (SVAR) in an open economy approach. The monthly data spanning from June 1998 until January 2019 has been used in examining the propagation of the monetary policy and oil price impulses on the movement of public and private bonds across maturity periods. The main findings using the impulse response function revealed that monetary policy shocks contribute to bond yield's positive movement across the term structure. However, the oil price shock causes a negative direction of the bond yields.