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Monetary Policy Regimes and the Volatility of Long-Term Interest Rates

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  • Queijo von Heideken, Virginia

    ()
    (Research Department, Central Bank of Sweden)

Abstract

This paper addresses two important questions that have, so far, been studied separately in the literature. First, the paper aims at explaining the high volatility of long-term interest rates observed in the data, which is hard to replicate using standard macro models. Building a small-scale macroeconomic model and estimating it on U.S. and U.K. data, I show that the policy responses of a central bank that is uncertain about the natural rate of unemployment can explain this volatility puzzle. Second, the paper aims at shedding new light on the distinction between rules and discretion in monetary policy. My empirical results show that using yield curve data may facilitate the empirical discrimination between different monetary policy regimes and that U.S. monetary policy is best understood as originating from a discretionary regime since 1960.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 220.

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Length: 53 pages
Date of creation: 01 Feb 2008
Date of revision:
Handle: RePEc:hhs:rbnkwp:0220

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
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Web page: http://www.riksbank.com/
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Keywords: long-term interest rates; optimal monetary policy; discretion; commitment; Bayesian estimation;

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References

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