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Monetary Policy, Bond Risk Premia, and the Economy

Listed author(s):
  • Peter N. Ireland

    ()

    (Boston College)

This paper develops an affine model of the term structure of interest rates in which bond yields are driven by observable and unobservable macroeconomic factors. It imposes restrictions to identify the effects of monetary policy and other structural disturbances on output, inflation, and interest rates and to decompose movements in long-term rates into terms attributable to changing expected future short rates versus risk premia. The estimated model highlights a broad range of channels through which monetary policy affects risk premia and the economy, risk premia affect monetary policy and the economy, and the economy affects monetary policy and risk premia.

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File URL: http://fmwww.bc.edu/EC-P/wp852.pdf
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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 852.

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Date of creation: 01 Feb 2014
Handle: RePEc:boc:bocoec:852
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  9. Sharon Kozicki & Peter A. Tinsley, 1997. "Shifting endpoints in the term structure of interest rates," Research Working Paper 97-08, Federal Reserve Bank of Kansas City.
  10. Michael D. Bauer, 2015. "Restrictions on Risk Prices in Dynamic Term Structure Models," CESifo Working Paper Series 5241, CESifo Group Munich.
  11. Andrew Atkeson & Patrick J. Kehoe, 2009. "On the Need for a New Approach to Analyzing Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 389-425 National Bureau of Economic Research, Inc.
  12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  13. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
  14. Taeyoung Doh, 2007. "What does the yield curve tell us about the Federal Reserve's implicit inflation target?," Research Working Paper RWP 07-10, Federal Reserve Bank of Kansas City.
  15. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  16. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
  17. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Oxford University Press, vol. 58(3), pages 495-514.
  18. Favero, Carlo A. & Kaminska, Iryna & Söderström, Ulf, 2005. "The Predictive Power of the Yield Spread: Further Evidence and A Structural Interpretation," CEPR Discussion Papers 4910, C.E.P.R. Discussion Papers.
  19. Peter Ireland, 1999. "A Method for Taking Models to the Data," Computing in Economics and Finance 1999 1233, Society for Computational Economics.
  20. Peter Hördahl & Oreste Tristani, 2012. "Inflation Risk Premia In The Term Structure Of Interest Rates," Journal of the European Economic Association, European Economic Association, vol. 10(3), pages 634-657, 05.
  21. Javier Andres & J. David López-Salido & Edward Nelson, 2004. "Tobin's imperfect asset substitution in optimizing general equilibrium," Working Papers 2004-003, Federal Reserve Bank of St. Louis.
  22. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
  23. Bennett T. McCallum, 2005. "Monetary policy and the term structure of interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-21.
  24. Kozicki, Sharon & Tinsley, P. A., 2001. "Term structure views of monetary policy under alternative models of agent expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 149-184, January.
  25. Dewachter, Hans & Iania, Leonardo, 2009. "An Extended Macro-Finance Model with Financial Factors," MPRA Paper 17634, University Library of Munich, Germany.
  26. Hamilton, James D & Kim, Dong Heon, 2002. "A Reexamination of the Predictability of Economic Activity Using the Yield Spread," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 340-360, May.
  27. Dewachter, Hans & Iania, Leonardo & Lyrio, Marco, 2011. "Information in the Yield Curve: A Macro-Finance Approach," Insper Working Papers wpe_230, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  28. Peter N. Ireland, 2007. "Changes in the Federal Reserve's Inflation Target: Causes and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1851-1882, December.
  29. 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.
  30. Marcello Pericoli & Marco Taboga, 2008. "Canonical Term-Structure Models with Observable Factors and the Dynamics of Bond Risk Premia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1471-1488, October.
  31. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
  32. Michael T. Kiley, 2014. "The Aggregate Demand Effects of Short- and Long-Term Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 10(4), pages 69-104, December.
  33. Han Chen & Vasco Cúrdia & Andrea Ferrero, 2011. "The macroeconomic effects of large-scale asset purchase programs," Staff Reports 527, Federal Reserve Bank of New York.
  34. John H. Cochrane, 2007. "Determinacy and Identification with Taylor Rules," NBER Working Papers 13409, National Bureau of Economic Research, Inc.
  35. Scott Joslin & Anh Le & Kenneth J. Singleton, 2013. "JFEC Invited Paper: Gaussian Macro-Finance Term Structure Models with Lags," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 11(4), pages 581-609, September.
  36. Glenn D. Rudebusch & Brian P. Sack & Eric T. Swanson, 2007. "Macroeconomic implications of changes in the term premium," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 241-270.
  37. Jonathan H. Wright, 2006. "The yield curve and predicting recessions," Finance and Economics Discussion Series 2006-07, Board of Governors of the Federal Reserve System (U.S.).
  38. Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
  39. Glenn D. Rudebusch & Eric T. Swanson, 2008. "The bond premium in a DSGE model with long-run real and nominal risks," Working Paper Series 2008-31, Federal Reserve Bank of San Francisco.
  40. repec:cup:jfinqa:v:46:y:2011:i:06:p:1893-1916_00 is not listed on IDEAS
  41. 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.
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