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A macro-finance model of the term structure, monetary policy, and the economy

  • Glenn D. Rudebusch
  • Tao Wu

This paper develops and estimates a macro-finance model that combines a canonical affine no-arbitrage finance specification of the term structure with standard macroeconomic aggregate relationships for output and inflation. From this new empirical formulation, we obtain several important results: (1) the latent term structure factors from finance no-arbitrage models appear to have important macroeconomic and monetary policy underpinnings, (2) there is no evidence of monetary policy inertia or a slow partial adjustment of the policy interest rate by the Federal Reserve, and (3) both forward-looking and backward-looking elements play important roles in macroeconomic dynamics.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2003-17.

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Date of creation: 2003
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Handle: RePEc:fip:fedfwp:2003-17
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  1. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  2. Woodford, Michael, 2000. "Optimal Monetary Policy Inertia," Seminar Papers 666, Stockholm University, Institute for International Economic Studies.
  3. Glenn D. Rudebusch, 2002. "Assessing the Lucas critique in monetary policy models," Working Paper Series 2002-02, Federal Reserve Bank of San Francisco.
  4. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2003. "The excess sensitivity of long-term interest rates: evidence and implications for macroeconomic models," Finance and Economics Discussion Series 2003-50, Board of Governors of the Federal Reserve System (U.S.).
  5. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 311-344, April.
  6. Peter Hordahl & Oreste Tristani & David Vestin, 2004. "A joint econometric model of macroeconomic and term structure dynamics," Money Macro and Finance (MMF) Research Group Conference 2003 48, Money Macro and Finance Research Group.
  7. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  8. Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
  9. Glenn D. Rudebusch, 1999. "Is the Fed too timid? Monetary policy in an uncertain world," Working Papers in Applied Economic Theory 99-05, Federal Reserve Bank of San Francisco.
  10. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters, in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
  11. Tao Wu, 2001. "Macro factors and the affine term structure of interest rates," Working Paper Series 2002-06, Federal Reserve Bank of San Francisco.
  12. Andrew G Haldane & Vicky Read, 2000. "Monetary policy surprises and the yield curve," Bank of England working papers 106, Bank of England.
  13. Constantinides, George M, 1992. "A Theory of the Nominal Term Structure of Interest Rates," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 531-52.
  14. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-48, November.
  15. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, October.
  16. Glenn D. Rudebusch & Jeffrey C. Fuhrer, 2002. "Estimating the Euler equation for output," Working Paper Series 2002-12, Federal Reserve Bank of San Francisco.
  17. Söderlind, Paul & Söderström, Ulf & Vredin, Anders, 2003. "Taylor Rules and the Predictability of Interest Rates," Working Paper Series 147, Sveriges Riksbank (Central Bank of Sweden).
  18. Svensson, L-E-O, 1997. "Inflation Targeting : Some Extensions," Papers 625, Stockholm - International Economic Studies.
  19. Dewachter, H.D.R. & Lyrio, M., 2003. "Macro factors and the Term Structure of Interest Rates," ERIM Report Series Research in Management ERS-2003-037-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  20. Dai, Qiang & Singleton, Kenneth J., 2002. "Expectation puzzles, time-varying risk premia, and affine models of the term structure," Journal of Financial Economics, Elsevier, vol. 63(3), pages 415-441, March.
  21. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  22. Athanasios Orphanides & John C. Williams, 2003. "Inflation scares and forecast-based monetary policy," Working Paper 2003-21, Federal Reserve Bank of Atlanta.
  23. 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.
  24. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
  25. Bomfim, Antulio N & Rudebusch, Glenn D, 2000. "Opportunistic and Deliberate Disinflation under Imperfect Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 707-21, November.
  26. Francis X. Diebold & Glenn D. Rudebusch & S. Boragan Aruoba, 2003. "The macroeconomy and the yield curve: a nonstructural analysis," Working Paper Series 2003-18, Federal Reserve Bank of San Francisco.
  27. English William B. & Nelson William R. & Sack Brian P., 2003. "Interpreting the Significance of the Lagged Interest Rate in Estimated Monetary Policy Rules," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-18, April.
  28. Sharon Kozicki, 1999. "How useful are Taylor rules for monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-33.
  29. 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.
  30. Andrew Ang & Monika Piazzesi & Min Wei, 2003. "What does the yield curve tell us about GDP growth?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  31. Richard Dennis, 2004. "New Keynesian Optimal-Policy Models: An Empirical Assessment," Royal Economic Society Annual Conference 2004 152, Royal Economic Society.
  32. Tore Ellingsen & Ulf Soderstrom, 2001. "Monetary Policy and Market Interest Rates," American Economic Review, American Economic Association, vol. 91(5), pages 1594-1607, December.
  33. Alan S. Blinder, 1986. "More on the Speed of Adjustment in Inventory Models," NBER Working Papers 1913, National Bureau of Economic Research, Inc.
  34. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
  35. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, June.
  36. Glenn D. Rudebusch, 2001. "Term structure evidence on interest rate smoothing and monetary policy inertia," Working Paper Series 2001-02, Federal Reserve Bank of San Francisco.
  37. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
  38. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
  39. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
  40. Peter Hordahl & Oreste Tristani & David Vestin, 2003. "A joint econometric model of macroeconomic and term structure," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  41. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
  42. 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.
  43. Rudebusch, Glenn D., 2000. "Assessing nominal income rules for monetary policy with model and data uncertainty," Working Paper Series 0014, European Central Bank.
  44. Mark Fisher, 2001. "Forces that shape the yield curve," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 1-15.
  45. Antulio N. Bomfim, 2003. "Monetary policy and the yield curve," Finance and Economics Discussion Series 2003-15, Board of Governors of the Federal Reserve System (U.S.).
  46. 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.
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