No-arbitrage Taylor rules

Andrew Ang, Sen Dong and Monika Piazzesi

Proceedings, 2005

Abstract: 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 GDP growth account for over half of the time-variation of yield levels and we attribute almost all of the movements in the term spread to inflation. Taylor rules estimated with no-arbitrage restrictions differ substantially from Taylor rules estimated by OLS and monetary policy shocks identified with no-arbitrage techniques are less volatile than their OLS counterparts.

Keywords: Taylor's rule; Monetary policy; Fiscal policy (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (149)

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Working Paper: No-Arbitrage Taylor Rules (2007)
Working Paper: No-Arbitrage Taylor Rules (2005)
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