No-Arbitrage Taylor Rules

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.

[1]  Carlo A. Favero.  Taylor rules and the term structure , 2006 .

[2]  Jean Boivin.  Has U.S. Monetary Policy Changed? Evidence from Drifting Coefficients and Real-Time Data , 2006 .

[3]  Ruslan Bikbov,et al.  No-Arbitrage Macroeconomic Determinants of the Yield Curve , 2006 .

[4]  Jean Boivin.  Has Us Monetary Policy Changed? Evidence from Drifting Coefficients and Real-Time Data , 2005 .

[5]  Stanley E. Zin,et al.  Taylor Rules, Mccallum Rules and the Term Structure of Interest Rates , 2005 .

[6]  Monika Piazzesi.  Bond Yields and the Federal Reserve , 2005, Journal of Political Economy.

[7]  G. Bekaert,et al.  New-Keynesian Macroeconomics and the Term Structure , 2005 .

[8]  Glenn D. Rudebusch,et al.  The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach , 2004 .

[9]  Qiang Dai,et al.  Government Deficits and Interest Rates: A No-Arbitrage Structural VAR Approach , 2004 .

[10]  Peter Hördahl,et al.  A Joint Econometric Model of Macroeconomic and Term Structure Dynamics , 2003, SSRN Electronic Journal.

[11]  Andrew Ang,et al.  The Term Structure of Real Rates and Expected Inflation , 2004 .

[12]  Jean Boivin,et al.  Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach , 2003 .

[13]  Hao Zhou,et al.  Regime Shifts, Risk Premiums in the Term Structure, and the Business Cycle , 2003 .

[14]  Glenn D. Rudebusch,et al.  A Macro-Finance Model of the Term Structure, Monetary Policy, and the Economy , 2003 .

[15]  T. Sargent,et al.  Drifts and Volatilities: Monetary Policies and Outcomes in the Post WWII U.S. , 2003 .

[16]  Timothy Cogley.  An Exploration of Evolving Term Stucture Relations , 2003 .

[17]  Carlo A. Favero,et al.  Macroeconomic Stability and the Preferences of the Fed: A Formal Analysis, 1961-98 , 2001 .

[18]  D. Romer,et al.  A New Measure of Monetary Shocks: Derivation and Implications , 2003 .

[19]  R. Goldstein,et al.  Identification and Estimation of 'Maximal' Affine Term Structure Models: An Application to Stochastic Volatility , 2003 .

[20]  H. Dewachter,et al.  Macro Factors and the Term Structure of Interest Rates , 2003 .

[21]  Min Wei,et al.  What Does the Yield Curve Tell Us About GDP Growth? , 2003 .

[22]  James H. Stock,et al.  Has the Business Cycle Changed? Evidence and Explanations , 2003 .

[23]  Giorgio E. Primiceri,et al.  Time Varying Structural Vector Autoregressions and Monetary Policy , 2002 .

[24]  H. D. Witte,et al.  Empirical Analysis of the Yield Curve: The Information in the Data Viewed through the Window of Cox, Ingersoll, and Ross , 2002 .

[25]  Michael W. Brandt,et al.  Comparing Multifactor Models of the Term Structure , 2002 .

[26]  Nicholas G. Polson,et al.  MCMC Methods for Financial Econometrics , 2002 .

[27]  K. Singleton,et al.  Expectation puzzles, time-varying risk premia, and affine models of the term structure , 2002 .

[28]  Carlo A. Favero,et al.  Macroeconomic Stability and the Preferences of the Fed. A Formal Analysis, 1961-98 , 2001 .

[29]  M. Fleming.  Measuring Treasury Market Liquidity , 2001 .

[30]  P. Mikkelsen,et al.  Mcmc Based Estimation of Term Structure Models Mcmc Based Estimation of Term Structure Models , 2022 .

[31]  T. Sargent,et al.  Evolving Post-World War II U.S. Inflation Dynamics , 2001, NBER Macroeconomics Annual.

[32]  G. Duffee.  Term premia and interest rate forecasts in affine models , 2000 .

[33]  Nicholas G. Polson,et al.  The Impact of Jumps in Volatility and Returns , 2000 .

[34]  M. Woodford.  Pitfalls of Forward-Looking Monetary Policy , 2000 .

[35]  S. Ramlee,et al.  Is the Fisher Effect for Real?: Testing the Robustness of the Long Run Fisher Effect in the G7 Countries , 2022 .

[36]  Andrew Ang,et al.  A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables , 2003 .

[37]  Chang‐Jin Kim,et al.  State-Space Models with Regime-Switching: Classical and Gibbs Sampling Approaches with Applications , 1999 .

[38]  Chang‐Jin Kim,et al.  State Space Models with Regime Switching , 1999 .

[39]  C. Sims.  DRIFT AND BREAKS IN MONETARY POLICY , 1999 .

[40]  David A. Marshall,et al.  Monetary policy and the term structure of nominal interest rates: evidence and theory , 1998 .

[41]  John B. Taylor,et al.  An Historical Analysis of Monetary Policy Rules , 1998 .

[42]  Glenn D. Rudebusch,et al.  Policy Rules for Inflation Targeting , 1998 .

[43]  J. Galí,et al.  Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory , 1998 .

[44]  Lawrence J. Christiano,et al.  Monetary Policy Shocks: What Have We Learned and to What End? , 1998 .

[45]  Carlo A. Favero,et al.  Measuring Monetary Policy with VAR Models: An Evaluation , 1997 .

[46]  J. Galí,et al.  Monetary Policy Rules in Practice: Some International Evidence , 1997 .

[47]  K. Singleton,et al.  Specification Analysis of Affine Term Structure Models , 1997 .

[48]  D. Duffie,et al.  A YIELD-FACTOR MODEL OF INTEREST RATES , 1996 .

[49]  Lars E. O. Svensson.  Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets , 1996 .

[50]  M. Gertler,et al.  How the Bundesbank Conducts Monetary Policy , 1996 .

[51]  Lars E. O. Svensson.  In‡ation Forecast Targeting: Implementing and Monitoring In‡ation Targets , 1996 .

[52]  Martin Eichenbaum,et al.  Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates , 1995 .

[53]  Michael K. Salemi.  Revealed Preference of the Federal Reserve: Using Inverse-Control Theory to Interpret the Policy Equation of a Vector Autoregression , 1995 .

[54]  J. Cochrane.  What Do the Vars Mean?: Measuring the Output Effects of Monetary Policy , 1995 .

[55]  B. Bernanke,et al.  Measuring Monetary Policy , 1995 .

[56]  Jeffrey C. Fuhrer,et al.  Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output , 1995 .

[57]  R. Kohn,et al.  On Gibbs sampling for state space models , 1994 .

[58]  S. Schaefer,et al.  Interest rate volatility and the shape of the term structure , 1994, Philosophical Transactions of the Royal Society of London. Series A: Physical and Engineering Sciences.

[59]  Lawrence J. Christiano,et al.  The Effects of Monetary Policy Shocks: Some Evidence from the Flow of Funds , 1996 .

[60]  M. Newton.  Approximate Bayesian-inference With the Weighted Likelihood Bootstrap , 1994 .

[61]  Ren-Raw Chen,et al.  Maximum Likelihood Estimation for a Multifactor Equilibrium Model of the Term Structure of Interest Rates , 1993 .

[62]  John B. Taylor.  Discretion versus policy rules in practice , 1993 .

[63]  J. Q. Smith,et al.  1. Bayesian Statistics 4 , 1993 .

[64]  R. Fildes.  Forecasting structural time series models and the kalman filter: Andrew Harvey, 1989, (Cambridge University Press), 554 pp., ISBN 0-521-32196-4 , 1992 .

[65]  G. Constantinides.  A Theory of the Nominal Term Structure of Interest Rates , 1992 .

[66]  C. Sims.  Interpreting the macroeconomic time series facts: The effects of monetary policy☆ , 1992 .

[67]  A. Raftery,et al.  How Many Iterations in the Gibbs Sampler , 1991 .

[68]  Frederic S. Mishkin.  Is the Fisher Effect for Real? A Reexamination of the Relationship between Inflation and Interest Rates , 1991 .

[69]  Marvin Goodfriend,et al.  Interest Rates and the Conduct of Monetary Policy , 1990 .

[70]  R. Barro.  Interest-Rate Smoothing , 1988 .