Term Premia: Endogenous Constraints on Monetary Policy

FRB of Kansas City Research Working Paper No. 02-07

30 Pages Posted: 5 May 2003

See all articles by Sharon Kozicki

Sharon Kozicki

Bank of Canada

Peter A. Tinsley

George Washington University; Birkbeck College, Univ. of London

Date Written: December 2002

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.

Keywords: Optimal Policy, Term Structure of Interest Rates, Monetary Policy Transmission

JEL Classification: E4, E5, G1

Suggested Citation

Kozicki, Sharon and Tinsley, Peter A., Term Premia: Endogenous Constraints on Monetary Policy (December 2002). FRB of Kansas City Research Working Paper No. 02-07, Available at SSRN: https://ssrn.com/abstract=386222 or http://dx.doi.org/10.2139/ssrn.386222

Sharon Kozicki

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

Peter A. Tinsley (Contact Author)

George Washington University ( email )

710 21st Street NW
Washington, DC 20052
United States

Birkbeck College, Univ. of London

Malet Street
London, WC1E 7HX
United Kingdom