The Role of Uncertainty in the Term Structure of Interest Rates: A Macro-Finance Perspective
AbstractUsing a macroeconomic perspective, we examine the effect of uncertainty arising from policy-shock volatility on yield-curve dynamics. Many macro-finance models assume that policy shocks are homoskedastic, while observed policy shock processes are significantly time varying and persistent. We allow for this key feature by constructing a no-arbitrage GARCH affine term structure model, in which monetary policy uncertainty is modeled as the conditional volatility of the error term in a Taylor rule. We find that monetary policy uncertainty increases the medium- and longer-term spreads in a model that incorporates macroeconomic dynamics.
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-724.
Length: 26 pages
Date of creation: Mar 2010
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Other versions of this item:
- Junko Koeda & Ryo Kato, 2010. "The Role of Uncertainty in the Term Structure of Interest Rates: A Macro-Finance Perspective," CARF F-Series CARF-F-207, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
- NEP-ALL-2010-04-11 (All new papers)
- NEP-CBA-2010-04-11 (Central Banking)
- NEP-MAC-2010-04-11 (Macroeconomics)
- NEP-MON-2010-04-11 (Monetary Economics)
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