Monetary policy risk: Rules vs. discretion

David Backus, Stanley Zin, Mikhail Chernov and Irina Zviadadze

No 9611, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Long-run asset-pricing restrictions in a macro term-structure model identify discretionary monetary policy separately from a policy rule. We find that policy discretion is an important contributor to aggregate risk. In addition, discretionary easing coincides with good news about the macroeconomy in the form of lower inflation, higher output growth, and lower risk premiums on short-term nominal bonds. However, it also coincides with bad news about long-term financial conditions in the form of higher risk premiums on long-term nominal bonds. Shocks to the rule correlate with changes in the yield curve' s level. Shocks to discretion correlate with changes in its slope.

Keywords: Forward-looking models; Identification; Monetary policy; Affine bond-pricing (search for similar items in EconPapers)
JEL-codes: E43 E52 G12 (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Working Paper: Monetary Policy Risk: Rules vs. Discretion (2021)
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