Monetary Policy, Time-Varying Risk, and the Bond Market Debacle of 1994

Willem Thorbecke
1998 Social Science Research Network  
Bond prices plummeted in early 1994. These losses occurred while the Fed was raising interest rates. John Y. Campbell argues that the Fed could have triggered the losses either by communicating information about incipient inflation or by increasing uncertainty about monetary policy and thus required returns. This paper presents an intertemporal model relating asset returns to news about future inflation, interest rates, risk premia, and dividends. Using this model to shed light on the empirical
more » ... work it finds that both expected inflation and monetary policy uncertainty help explain the bond market debacle of 1994. JEL classification: E44
doi:10.2139/ssrn.65009 fatcat:flp3nb2phfee7noot6tmwecrau