Under bond rate transmission of monetary policy, standard restrictions on policy responses to obtain determinate inflation need not apply. In periods of passive policy, bond rates may exhibit stable responses to inflation if future policy is anticipated to be active, or if time-varying term premiums incorporate inflation-dependent risk pricing. We derive a generalized Taylor Principle that requires a lower bound to the average anticipated path of forward rate responses to inflation. We also present a no-arbitrage term structure model with horizon-dependent policy and time-varying term premiums to explain mechanics and provide empirical results supporting these channels
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