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A Preferred Habitat View of Yield Curve Control


August 1, 2022
Junko Koeda*1
Yoichi Ueno*2


We extend the canonical preferred habitat term structure model of Vayanos and Vila (2021) to analyze yield curve control (YCC) by treating the central bank as a preferred habitat investor allowing the price elasticity of government bond demand to depend on its targeted yield. The price elasticity captures the strictness of YCC implemented by the central bank. We calibrate the model for Japan and find that sufficiently strict YCC requires limited additional bond purchases to keep the targeted yield within the targeted range, and attenuates the impact of short-rate changes in the yield curve. In the absence of YCC, the effect of bond demand and supply on bond yields increases once again as the influence of the effective lower bound on nominal interest rates weakens.

JEL classification
E43, E52, E58, G12

monetary policy, yield curve control, preferred habitat

The authors are grateful to Kazuo Ueda and colleagues at the Bank of Japan for comments and discussions. Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan.

  1. *1Waseda University
    E-mail :
  2. *2Monetary Affairs Department (currently Personnel and Corporate Affairs Department)


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