No-Arbitrage Taylor Rules
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Columbia Business School - Economics Department
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
NBER Working Paper No. w13448
We estimate Taylor (1993) rules and identify monetary policy shocks using no-arbitrage pricing techniques. Long-term interest rates are risk-adjusted expected values of future short rates and thus provide strong over-identifying restrictions about the policy rule used by the Federal Reserve. The no-arbitrage framework also accommodates backward-looking and forward-looking Taylor rules. We find that inflation and output gap account for over half of the variation of time-varying excess bond returns and most of the movements in the term spread. Taylor rules estimated with no-arbitrage restrictions differ from Taylor rules estimated by OLS, and the resulting monetary policy shocks are somewhat less volatile than their OLS counterparts.
Number of Pages in PDF File: 51working papers series
Date posted: September 28, 2007
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.547 seconds