Uncertainty Shocks, Monetary Policy and Long-Term Interest Rates

55 Pages Posted: 14 Apr 2019

See all articles by Gianni Amisano

Gianni Amisano

Board of Governors of the Federal Reserve System; European Central Bank (ECB); University of Bologna - Rimini Center for Economic Analysis (RCEA); University of Brescia - Department of Economics

Oreste Tristani

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: 2019-04-11

Abstract

We study the relationship between monetary policy and long-term rates in a structural, general equilibrium model estimated on both macro and yields data from the United States. Regime shifts in the conditional variance of productivity shocks, or "uncertainty shocks", are an important model ingredient. First, they account for countercyclical movements in risk premia. Second, they induce changes in the demand for precautionary saving, which affects expected future real rates. Through changes in both risk-premia and expected future real rates, uncertainty shocks account for about 1/2 of the variance of long-term nominal yields over long horizons. The remaining driver of long-term yields are changes in in ation expectations induced by conventional, autoregressive shocks. Long-term in ation expectations implied by our model are in line with those based on survey data over the 1980s and 1990s, but less dogmatically anchored in the 2000s.

Keywords: Monetary policy rules, Uncertainty shocks, Term structure of interest rates, Regime switches, Bayesian estimation

JEL Classification: E40, C11, E43, E52, C34

Suggested Citation

Amisano, Gianni and Tristani, Oreste, Uncertainty Shocks, Monetary Policy and Long-Term Interest Rates (2019-04-11). FEDS Working Paper No. 2019-024. Available at SSRN: https://ssrn.com/abstract=3371460 or http://dx.doi.org/10.17016/FEDS.2019.024

Gianni Amisano (Contact Author)

Board of Governors of the Federal Reserve System

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United States

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Oreste Tristani

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

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