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The term structure of policy rules

Author Info

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

Abstract

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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File URL: http://www.sciencedirect.com/science/article/B6VBW-4X9TV03-5/2/fe14ee7dcef8feeb1f91eea2d810c338
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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

Keywords: Affine models No arbitrage Monetary policy rules Term structure of interest rates;

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  1. Troy Davig & Eric M. Leeper, 2005. "Generalizing the Taylor Principle," NBER Working Papers 11874, National Bureau of Economic Research, Inc.
  2. Seonghoon Cho & Antonio Moreno & Geert Bekaert, 2005. "New-Keynesian Macroeconomics and the Term Structure," Faculty Working Papers 04/05, School of Economics and Business Administration, University of Navarra.
  3. Andrew Ang & Sen Dong & Monika Piazzesi, 2005. "No-arbitrage Taylor rules," Proceedings, Federal Reserve Bank of San Francisco.
  4. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  5. Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand.
  6. 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.
  7. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
  8. 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.
  9. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  10. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316 National Bureau of Economic Research, Inc.
  11. 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.
  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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Cited by:

  1. David Backus & Mikhail Chernov & Stanley Zin, 2013. "Identifying Taylor Rules in Macro-finance Models," Working Papers 13-12, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. John Y. Campbell & Carolin Pflueger & Luis M. Viceira, 2014. "Monetary Policy Drivers of Bond and Equity Risks," NBER Working Papers 20070, National Bureau of Economic Research, Inc.
  3. Jagjit S Chadha & Philip Turner & Fabrizio Zampolli, 2013. "The interest rate effects of government debt maturity," BIS Working Papers 415, Bank for International Settlements.
  4. Kaya, Huseyin, 2013. "The yield curve and the macroeconomy: Evidence from Turkey," Economic Modelling, Elsevier, vol. 32(C), pages 100-107.
  5. Joslin, Scott & Le, Anh & Singleton, Kenneth J., 2013. "Why Gaussian macro-finance term structure models are (nearly) unconstrained factor-VARs," Journal of Financial Economics, Elsevier, vol. 109(3), pages 604-622.
  6. Ceballos, Luis & Naudon, Alberto & Romero, Damian, 2014. "Nominal Term Structure and Term Premia. Evidence from Chile," MPRA Paper 60911, University Library of Munich, Germany.

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