Template-Type: ReDIF-Paper 1.0
Author-Name: Kevin Salyer
Author-Name-First: Kevin
Author-Name-Last: Salyer
Author-Name: Oscar Jorda
Author-Name-First: Oscar
Author-Name-Last: Jorda
Author-Workplace-Name: Department of Economics, University of California Davis
Title: The Response of Term Rates to Monetary Policy Uncertainty
Abstract: This paper shows that greater uncertainty about monetary policy can lead to a decline in nominal interest rates. In the context of a limited participation model, monetary policy uncertainty is modeled as a mean-preserving spread in the distribution for the money growth process. This increase in uncertainty lowers the yield on short-term maturity bonds because the household sector responds by increasing liquidity in the banking sector. Long-term maturity bonds also have lower yields but this decrease is a result of the effect that greater uncertainty has on the nominal intertemporal rate of substitution - which is a convex function of money growth. These predictions are broadly supported by the data: the conditional variance of monetary policy shocks identified from a conventional monetary VAR negatively affects the yields of federal funds, and the three and six-month treasury bills.
Length: 33
File-URL: https://repec.dss.ucdavis.edu/files/qsqwXH15daj1ed4rARqa2NTY/01-6.pdf
File-Format: application/pdf
Number: 274
Classification-JEL: E4, E5, E2
KeyWords: limited participation, term structure, time-varying uncertainty
Creation-Date: 20030115
Handle: RePEc:cda:wpaper:274