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Money supply and the yield curve

Published online by Cambridge University Press:  10 January 2025

Libo Xu
Libo Xu*
Affiliation:
Department of Economics, Lakehead University, Thunder Bay, Canada
*
Email: lxu@lakeheadu.ca
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Abstract

This paper studies the dynamic interactions between the money supply and the shape of the yield curve in the context of a regime-switching latent factor model. Estimates show that the money supply has important implications for the level, slope, and curvature of the yield curve. Moreover, the Divisia aggregates can provide more information than simple-sum aggregates based on parameter estimates and impulse response functions in understanding the dynamics of the yield curve. The favored broad Divisia aggregate could especially be associated with changes in the yield curve’s level, slope, and curvature over the business cycle. Therefore, this paper highlights the important role of Divisia aggregates in the linkage between financial markets and monetary policy.

Keywords

Money supplyDivisia aggregatesyield to maturityyield curveC32E44E52G17
Type
Articles
Information
Macroeconomic Dynamics , First View , pp. 1 - 18
Copyright
© The Author(s), 2025. Published by Cambridge University Press

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