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Monetary Policy Regimes and the Volatility of Long-Term Interest Rates

Virginia Queijo von Heideken

No 220, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: This paper addresses two important questions that have, so far, been studied separately in the literature. First, the paper aims at explaining the high volatility of long-term interest rates observed in the data, which is hard to replicate using standard macro models. Building a small-scale macroeconomic model and estimating it on U.S. and U.K. data, I show that the policy responses of a central bank that is uncertain about the natural rate of unemployment can explain this volatility puzzle. Second, the paper aims at shedding new light on the distinction between rules and discretion in monetary policy. My empirical results show that using yield curve data may facilitate the empirical discrimination between different monetary policy regimes and that U.S. monetary policy is best understood as originating from a discretionary regime since 1960.

Keywords: long-term interest rates; optimal monetary policy; discretion; commitment; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 C13 C15 E32 E42 E43 E47 E50 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2008-02-01
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0220

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