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The Response of Term Rates to Monetary Policy Uncertainty Author info | Abstract | Publisher info | Download info | Related research | Statistics Oscar Jorda (University of California, Davis)
Kevin Salyer (University of California, Davis)
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This paper shows that greater uncertainty about monetary policy can lead to a decline in nominal interest rates. In the context of a limited participation model, monetary policy uncertainty is modeled as a mean preserving spread in the distribution for the money growth process. This increase in uncertainty lowers the yield on short-term maturity bonds because the household sector responds by increasing liquidity in the banking sector. Long-term maturity bonds also have lower yields but this decrease is a result of the effect that greater uncertainty has on the nominal intertemporal rate of substitution––which is a convex function of money growth. We examine the nature of these relations empirically by introducing the GARCH-SVAR model––a multivariate generalization of the GARCH-M model. The predictions of the model are broadly supported by the data: higher uncertainty in the federal funds rate can lower the yields of the three- and six-month treasury bill rates. (Copyright: Elsevier)
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics .
Volume (Year): 6 (2003)
Issue (Month): 4 (October)
Pages: 941-962
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Handle: RePEc:red:issued:v:6:y:2003:i:4:p:941-962Contact details of provider: Postal: Review of Economic Dynamics Academic Press Editorial Office 525 "B" Street, Suite 1900 San Diego, CA 92101 Fax: 1-860-486-4463 Email: Web page: http://www.EconomicDynamics.org/review.htm More information through EDIRC
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Keywords: Limited participation ; Term structure ; Mean preserving spread ; Multivariate GARCH ; GARCH-SVAR ; Other versions of this item:
Find related papers by JEL classification: E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
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