(Un)expected monetary policy shocks and term premia. (31st August 2021)

• Record Type: Journal Article
• Authors: Kliem, Martin; Meyer‐Gohde, Alexander
• Is Part Of: Journal of applied econometrics. Volume 37:Number 3(2022)
• Page Start: 477
• Page End: 499
• Publication Date: 2021-08-31
• Subjects: Bayesian estimation -- DSGE model -- monetary policy -- time‐varying risk premia; Econometrics -- Periodicals; 330.015195
• DOI: 10.1002/jae.2872
• Languages: English
• ISSNs: 0883-7252

Abstract

Summary: The term structure of interest rates is crucial for the transmission of monetary policy to financial markets and the macroeconomy. Disentangling the impact of monetary policy on the components of interest rates, expected short rates, and term premia is essential to understanding this channel. To accomplish this, we provide a quantitative structural model with endogenous, time‐varying term premia that are consistent with empirical findings. News about future policy, in contrast to unexpected policy shocks, has quantitatively significant effects on term premia along the entire term structure. This provides a plausible explanation for partly contradictory estimates in the empirical literature.