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The term structure of policy rules

  • Smith, Josephine M.
  • Taylor, John B.

A formula is derived that links the coefficients of the monetary policy rule for the short-term interest rate to the coefficients of the implied affine equations for long-term interest rates. The formula predicts that an increase in the coefficients in the monetary policy rule will lead to an increase in the coefficients in the affine equations. Empirical evidence for such a prediction is provided. The curve of the response coefficients by maturity is also predicted by the formula. The formula's predictive accuracy and its closed form make it a useful tool for studying the policy implications of embedding no-arbitrage affine theories into macro models.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 7 (October)
Pages: 907-917

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Handle: RePEc:eee:moneco:v:56:y:2009:i:7:p:907-917
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  1. Geert Bekaert & Seonghoon Cho & Antonio Moreno, 2005. "New-Keynesian Macroeconomics and the Term Structure," NBER Working Papers 11340, National Bureau of Economic Research, Inc.
  2. Troy Davig & Eric M. Leeper, 2005. "Generalizing the Taylor principle," Research Working Paper RWP 05-13, Federal Reserve Bank of Kansas City.
  3. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
  4. Andrew Ang & Sen Dong, 2005. "No-Arbitrage Taylor Rules," 2005 Meeting Papers 22, Society for Economic Dynamics.
  5. Michael F. Gallmeyer & Burton Hollifield & Francisco Palomino & Stanley E. Zin, 2007. "Arbitrage-Free Bond Pricing with Dynamic Macroeconomic Models," NBER Working Papers 13245, National Bureau of Economic Research, Inc.
  6. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
  7. Troy Davig & Eric M. Leeper, 2005. "Fluctuating Macro Policies and the Fiscal Theory," NBER Working Papers 11212, National Bureau of Economic Research, Inc.
  8. Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand.
  9. Glenn D. Rudebusch & Tao Wu, 2007. "Accounting for a Shift in Term Structure Behavior with No-Arbitrage and Macro-Finance Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 395-422, 03.
  10. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  11. Fuhrer, Jeffrey C, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1183-1209, November.
  12. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
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