Term premia: endogenous constraints on monetary policy
Sharon Kozicki () and
No RWP 02-07, Research Working Paper from Federal Reserve Bank of Kansas City
Monetary policy evaluation using structural macro models suggests that historical monetary policy responds less aggressively to inflation and the output gap than would an optimal policy rule. However, these results are obtained using models with constant term premia. This paper shows how term premia may depend on the policy rule specification and policy rate uncertainty. A more aggressive policy rule involves an economically important increase in term premia. Consequently, conclusions about the specification of optimal monetary policy rules based on counterfactual simulations of models that exclude term premia effects may not be valid.
Keywords: Monetary; policy (search for similar items in EconPapers)
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