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Home > Research and Studies > Bank of Japan Working Paper Series, Review Series, and Research Laboratory Series > Bank of Japan Working Paper Series 2022 > (Research Paper) A Preferred Habitat View of Yield Curve Control
August 1, 2022
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.
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.
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