"The Role of Uncertainty in the Term Structure of Interest Rates: A Macro-Finance Perspective"
Using a macroeconomic perspective, we examine the effect of uncertainty arising from policy-shock volatility on yield-curve dynamics. Many macro-finance models assume that policy shocks are homoskedastic, while observed policy shock processes are significantly time varying and persistent. We allow for this key feature by constructing a no-arbitrage GARCH affine term structure model, in which monetary policy uncertainty is modeled as the conditional volatility of the error term in a Taylor rule. We find that monetary policy uncertainty increases the medium- and longer-term spreads in a model that incorporates macroeconomic dynamics.
Year of publication: |
2010-03
|
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Authors: | Koeda, Junko ; Kato, Ryo |
Institutions: | Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics |
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