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Uncertainty shocks, monetary policy and long-term interest rates

Gianni Amisano and Oreste Tristani

No 2279, Working Paper Series from European Central Bank

Abstract: We study the relationship between monetary policy and long-term rates in a structural, general equilibrium model estimated on both macro and yields data from the United States. Regime shifts in the conditional variance of productivity shocks, or "uncertainty shocks", are an important model ingredient. First, they account for countercyclical movements in risk premia. Second, they induce changes in the demand for precautionary saving, which affects expected future real rates. Through changes in both risk-premia and expected future real rates, uncertainty shocks account for about 1/2 of the variance of long-term nominal yields over long horizons. The remaining driver of long-term yields are changes in inflation expectations induced by conventional, autoregressive shocks. Long-term inflation expectations implied by our model are in line with those based on survey data over the 1980s and 1990s, but less strongly anchored in the 2000s. JEL Classification: C11, C34, E40, E43, E52

Keywords: Bayesian estimation; monetary policy rules; regime switches; term structure of interest rates; uncertainty shocks (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: 337895
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20192279

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