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Term premia : endogenous constraints on monetary policy

  • Sharon Kozicki
  • Peter A. Tinsley

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.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 02-07.

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Date of creation: 2002
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Handle: RePEc:fip:fedkrw:rwp02-07
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