Developments in Macro-Finance Yield Curve Modelling, edited by Jagjit S. Chadha, Alain Durré, Michael A. S. Joyce, Lucio Sarno, 2013
38 Pages Posted: 3 Apr 2013 Last revised: 19 Oct 2014
Date Written: March 1, 2013
This paper studies the private sector’s perception of US monetary policy under the assumption that agents believe in a Taylor rule. We estimate agent specific Taylor rules on a unique dataset of macroeconomic forecasts from 1986 to 2011, and analyze time and state dependence in the perceived stance of the Central Bank. First, we uncover substantial time variation in the perception of how monetary policy is conducted. Second, we find that disagreement about the parameters of the rule and their associated uncertainty co-move. Third, we find that the policy rule in the mind of agents is both non-linear and state-dependent, and that dispersion in forecasts about future Fed funds rates is highly correlated with model uncertainty. Finally, we perform a three way decomposition of ‘policy uncertainty’ and find that uncertainty about arguments and deviations from the rule are important drivers for Treasury variance risk.
Keywords: Monetary Policy, Taylor Rules, Uncertainty, Differences in Beliefs
JEL Classification: D9, E3, E4, G12
Suggested Citation: Suggested Citation
Buraschi, Andrea and Carnelli, Andrea and Whelan, Paul, Believe It or Not: Taylor Rule Uncertainty (March 1, 2013). Developments in Macro-Finance Yield Curve Modelling, edited by Jagjit S. Chadha, Alain Durré, Michael A. S. Joyce, Lucio Sarno, 2013. Available at SSRN: https://ssrn.com/abstract=2242752 or http://dx.doi.org/10.2139/ssrn.2242752