The Response of Term Rates to Monetary Policy Uncertainty

Kevin Salyer () and Oscar Jorda

No 274, Working Papers from University of California, Davis, Department of Economics

Abstract: This paper shows that greater uncertainty about monetary policy can lead to a decline in nominal interest rates. In the context of a limited participation model, monetary policy uncertainty is modeled as a mean-preserving spread in the distribution for the money growth process. This increase in uncertainty lowers the yield on short-term maturity bonds because the household sector responds by increasing liquidity in the banking sector. Long-term maturity bonds also have lower yields but this decrease is a result of the effect that greater uncertainty has on the nominal intertemporal rate of substitution - which is a convex function of money growth. These predictions are broadly supported by the data: the conditional variance of monetary policy shocks identified from a conventional monetary VAR negatively affects the yields of federal funds, and the three and six-month treasury bills.

Keywords: limited participation; term structure; time-varying uncertainty (search for similar items in EconPapers)
JEL-codes: E2 E4 E5 (search for similar items in EconPapers)
Pages: 33
Date: 2003-01-15
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Citations: View citations in EconPapers (18)

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https://repec.dss.ucdavis.edu/files/qsqwXH15daj1ed4rARqa2NTY/01-6.pdf (application/pdf)

Related works:
Journal Article: The Response of Term Rates to Monetary Policy Uncertainty (2003)
Working Paper: The Response of Term Rates to Monetary Policy Uncertainty
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Persistent link: https://EconPapers.repec.org/RePEc:cda:wpaper:274

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