The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The Outreach and Education function engages, empowers and educates the Second District communities that the Bank serves, especially civic leaders, students, educators, small business owners, policymakers and the general public. It furthers the Bank's commitment to the region by listening to the communities we serve and leveraging our unique attributes to positively impact school and university programs, as well as analysis and research.
We present an affine term structure model for the joint pricing of real and nominal bond yields that explicitly accommodates liquidity risk premia. We estimate the model using a new, computationally efficient procedure that is based on return regressions. The model allows us to address a number of salient questions about the transmission of monetary policy. We show that variations in U.S. nominal term premia are primarily driven by variations in real term premia rather than inflation and liquidity risk premia. Nonetheless, adjusting breakevens for inflation and liquidity risk substantially improves forecasts of inflation. Our estimates imply that the Federal Reserve's large-scale asset purchases lowered Treasury yields primarily by reducing real term premia. Real term premia also account for the positive response of long-term real forward rates to surprise changes in the federal funds target. Applying our model to U.K. data, we find that the inflation risk premium dropped sharply when the Bank of England formally adopted an inflation target.