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Term premia : endogenous constraints on monetary policy

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  • Sharon Kozicki
  • Peter A. Tinsley

Abstract

Monetary policy evaluation using structural macro models suggests that historical monetary policy responds less aggressively to inflation and the output gap than would an optimal policy rule. However, these results are obtained using models with constant term premia. This paper shows how term premia may depend on the policy rule specification and policy rate uncertainty. A more aggressive policy rule involves an economically important increase in term premia. Consequently, conclusions about the specification of optimal monetary policy rules based on counterfactual simulations of models that exclude term premia effects may not be valid.

Suggested Citation

  • Sharon Kozicki & Peter A. Tinsley, 2002. "Term premia : endogenous constraints on monetary policy," Research Working Paper RWP 02-07, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp02-07
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    File URL: http://www.kansascityfed.org/Publicat/Reswkpap/pdf/RWP02-07.pdf
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    References listed on IDEAS

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    Cited by:

    1. Tillmann, Peter, 2007. "Inflation regimes in the US term structure of interest rates," Economic Modelling, Elsevier, vol. 24(2), pages 203-223, March.
    2. Peter Tillmann, 2004. "Cointegration and Regime-Switching Risk Premia in the US Term Structure of Interest Rates," Econometric Society 2004 North American Summer Meetings 26, Econometric Society.
    3. PeterTillmann, 2004. "Cointegration and Regime-Switching Risk Premia in the U.S. Term Structure of Interest Rates," Computing in Economics and Finance 2004 53, Society for Computational Economics.
    4. Osmani Teixeira De Carvalho Guillen & Benjamin M. Tabak, 2009. "Characterising the Brazilian term structure of interest rates," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 2(2), pages 103-114.
    5. Zbynek Stork, 2016. "Term Structure of Interest Rates: Macro-Finance Approach," EcoMod2016 9566, EcoMod.

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    Monetary policy;

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