Applications of an IS-MP Model with Yield Curve

X. Henry Wang; Bill Z. Yang

doi:10.3868/s060-005-016-0009-1

Front. Econ. China ›› 2016, Vol. 11 ›› Issue (1) : 142 -155. DOI: 10.3868/s060-005-016-0009-1

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Applications of an IS-MP Model with Yield Curve

X. Henry Wang ¹
, Bill Z. Yang ²

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Abstract

This paper presents an IS-MP model with the term structure of interest rates (i.e., the yield curve) and discusses some of its applications to recent macroeconomic activities and policy issues. Specifically, the model is employed to explain (1) why a steepening yield curve may signal the subsequent economic expansion, (2) why long-term zero interest rate policy (ZIRP) may not completely avoid recessions, but disables the yield curve from being inverted to signal the following economic recession, (3) how Operation Twist (OT) may help ease the recession, in particular, under ZIRP, and what limit it may face.

Keywords

IS-MP model / yield curve / zero interest rate policy (ZIRP) / Operation Twist (OT)

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X. Henry Wang, Bill Z. Yang. Applications of an IS-MP Model with Yield Curve. Front. Econ. China, 2016, 11(1): 142-155 DOI:10.3868/s060-005-016-0009-1