Monetary policy, the yield curve and the private sector behaviour of the US economy are modelled as a time-varying structural vector autoregression. The monetary policy shocks of the early 1980s explain a large portion of the persistence of inflation and the level of the term structure. Changes in inflation expectations implied by the yield curve account for the persistence of the federal funds rate. Failures of the expectations hypothesis are rare, and coincided with the credibility building of Paul Volcker's Fed tenure at the beginning of the 1980s and the sequence of consecutive policy rate cuts around the time of the early 1990s recession. Copyright © 2009 John Wiley & Sons, Ltd.