The Role of Uncertainty in the Term Structure of Interest Rates: A Macro-Finance Perspective
Junko Koeda and
Ryo Kato ()
No CARF-F-207, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo
Using a macroeconomic perspective, we examine the effect of uncertainty arising from policy-shock volatility on yield-curve dynamics. Many macro-finance models assume that policy shocks are homoskedastic, while observed policy shock processes are significantly time varying and persistent. We allow for this key feature by constructing a no-arbitrage GARCH affine term structure model, in which monetary policy uncertainty is modeled as the conditional volatility of the error term in a Taylor rule. We find that monetary policy uncertainty increases the medium- and longer-term spreads in a model that incorporates macroeconomic dynamics.
Pages: 26 pages
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Working Paper: The Role of Uncertainty in the Term Structure of Interest Rates: A Macro-Finance Perspective (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf207
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