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Uncertainty Shocks, Monetary Policy and Long-Term Interest Rates

Gianni Amisano and Oreste Tristani

No 2019-024, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

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 in ation expectations induced by conventional, autoregressive shocks. Long-term in ation expectations implied by our model are in line with those based on survey data over the 1980s and 1990s, but less dogmatically anchored in the 2000s.

Keywords: Monetary policy rules; Uncertainty shocks; Term structure of interest rates; Regime switches; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E40 C11 E43 E52 C34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2019-04-11
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2019-24

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DOI: 10.17016/FEDS.2019.024

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