Yield Curve Shocks : Identification and Information Sufficiency

We apply recently developed tests of information sufficiency in structural VARs to extract fundamental structural shocks to the yield curve. A medium-scale specification properly augmented with information on inflation expectations improves the sufficiency test for all specifications we consider. However, contractionary shocks to both the federal funds rate and the level of the yield curve give rise to important price puzzles—while shocks to the slope of the yield curve elicit sensible responses in the SVARs we estimated. Shocks that cause the yield curve to rotate may be particularly informative for economic activity and inflation dynamics. We conclude these shocks have an edge (over other types of yield curve or federal funds rate disturbances) in capturing the intertemporal tradeoffs agents make in the formulation of inflation expectations