Monetary Policy Shifts and the Term Structure
HEC Montreal; Columbia Business School; National Bureau of Economic Research (NBER)
Columbia Business School - Economics Department
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
March, 14 2008
AFA 2009 San Francisco Meetings Paper
We estimate the effect of shifts in monetary policy using the term structure of interest rates. In our no-arbitrage model, the short rate follows a version of the Taylor (1993) rule where the coefficients on inflation and output can vary over time. We find that monetary policy loadings on inflation, but not output, changed substantially over the last 50 years. Agents tend to assign a risk discount to monetary policy shifts and are willing to pay to be exposed to activist monetary policy. Over 1952-2006, if agents had assigned no value to active monetary policy, the slope of the yield curve would have been approximately 50 basis points higher, and up to twice as volatile, than what actually occurred in data.
Number of Pages in PDF File: 47
Keywords: Quadratic term structure model, Monetary policy, Interest rate risk, time-varying parameter model
JEL Classification: C13, C50, E43, E52, G12working papers series
Date posted: March 17, 2008
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