Forward Guidance in the Yield Curve: Short Rates versus Bond Supply

Robin Greenwood; Samuel Hanson; Dimitri Vayanos

doi:10.3386/w21750

Forward Guidance in the Yield Curve: Short Rates versus Bond Supply

Robin Greenwood, Samuel Hanson & Dimitri Vayanos

Working Paper 21750

DOI 10.3386/w21750

Issue Date December 2015

We present a model of the yield curve in which the central bank can provide market participants with forward guidance on both future short rates and on future Quantitative Easing (QE) operations, which affect bond supply. Forward guidance on short rates works through the expectations hypothesis, while forward guidance on QE works through expected future bond risk premia. If a QE operation is expected to be undone in the near term, then its announcement will have a hump-shaped effect on the yield and forward-rate curves; otherwise the effect may be increasing with maturity. Humps associated to QE announcements typically occur at maturities longer than those associated to short-rate announcements, even when the effects of the former are expected to last over a shorter horizon. We use our model to re-examine the empirical evidence on QE announcements in the US.

We thank Simone Manganelli (discussant), Mike Woodford, and participants at the Central Bank of Chile Annual Conference for helpful comments. Young Min Kim and Tiago Florido provided helpful research assistance. This research was funded by the Division of Research at Harvard Business School. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Additional and up-to-date author disclosures about outside activities are provided on the authors' personal websites.

Robin Greenwood
Robin Greenwood

This document contains a list of professional activities beyond my main employment at Harvard University. Please feel free to contact me with any questions about this disclosure statement.

Outside activities since 2008, paid and unpaid:

Academic Advisory Board, Martingale Asset Management (chairman) Consultant, Martingale Asset Management

AllianceBernstein, research presentation and consultation Capital structure consultation to two non-financial companies Associate Editor, Review of Financial Studies (unpaid) Editor, Review of Financial Studies (2014-present, unpaid)

Honoraria:

In 2014, the Brookings Institute paid me an honorarium for the working paper “Government Debt Management at the

Zero Lower Bound”

The Banco Central de Chile paid me an honorarium for the paper “Forward Guidance in the Yield Curve: Short Rates versus Bond Supply.”

No institution had any say on the content of these papers or on what I write.

Paid speeches and executive education:

HBS Investment Management Workshop (various years, since 2008) HBS Finance for Senior Executives (various years, unpaid before 2016) SanfordBernstein Research Conference

Robeco Q-Group Arrowstreet Capital Pyramis

Prudential

Windham Capital Management

Other:

Since September 2015, I have been a voting member on the Harvard University Committee on pensions. I do not do consulting work or make paid presentations to any investment managers employed or being considered by Harvard in this capacity.

As part of my work at Harvard Business School, I regularly write cases about hedge funds, investment managers, and their strategies. I receive no compensation from these managers for writing these cases, and the cases are not meant as endorsements of the managers or their strategies. I receive royalties (currently under $1500 per year) for cases I have written while employed at Harvard.

Last updated December 16, 2015
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Robin Greenwood, Samuel Hanson, and Dimitri Vayanos, "Forward Guidance in the Yield Curve: Short Rates versus Bond Supply," NBER Working Paper 21750 (2015), https://doi.org/10.3386/w21750.

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