The Role of Monetary Policy Uncertainty in the Term Structure of Interest Rates

Junko Koeda and Ryo Kato
Additional contact information
Junko Koeda: Assistant Professor, Department of Economics, University of Tokyo, 7-3-1, Hongo, Bunkyo-ku, Tokyo, Japan. Tel: +81-3- 5841-5649, (E-mail: jkoeda@e.u-tokyo.ac.jp)

No 10-E-24, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: We examine the effect of uncertainty arising from policy-shock volatility on yield-curve dynamics. In contrast to the assumption of many macro-finance models, policy-shock processes appear to be time varying and persistent. We allow for this heteroskedasticity by constructing a no-arbitrage GARCH affine term structure model, in which policy-shock volatility is defined as the conditional volatility of the error term in a Taylor rule. We find that an increase in monetary policy uncertainty raises the medium- and longer-term spreads in a model that incorporates macroeconomic dynamics.

Keywords: GARCH; Estimation; Term Structure of Interest Rates; Financial Markets and the Macro-economy; Monetary Policy (search for similar items in EconPapers)
JEL-codes: C13 C32 E43 E44 E52 (search for similar items in EconPapers)
Date: 2010-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.imes.boj.or.jp/research/papers/english/10-E-24.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:10-e-24

Access Statistics for this paper

More papers in IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Kinken ().