Aleš Bulíř, Jan Vlček
We use two representations of the yield curve, by Litterman and Scheinkman (1991) and by Diebold and Li (2006), to test the functioning of the interest rate transmission mechanism along the yield curve based on government paper in a sample of emerging market and low-income countries. We find a robust link from short-term policy and interbank rates to longer-term bond yields. Two policy implications emerge. First, the presence of well-developed secondary financial markets does not seem to affect transmission of short term rates along the yield curve. Second, the strength of the transmission mechanism seems to be affected by the choice of monetary regime: advanced countries with a credible IT regime seem to have “better behaved” yield curves than those with other monetary regimes.
JEL codes: E43, E52, G12
Keywords: Monetary transmission, yield curve
Issued: March 2016
Download: CNB WP No. 2/2016 (pdf, 463 kB)