Working Paper: CEPR ID: DP9611
Authors: David Backus; Mikhail Chernov; Stanley Zin; Irina Zviadadze
Abstract: Long-run asset-pricing restrictions in a macro term-structure model identify discretionary monetary policy separately from a policy rule. We find that policy discretionis an important contributor to aggregate risk. In addition, discretionary easing coincides with good news about the macroeconomy in the form of lower inflation, higher output growth, and lower risk premiums on short-term nominal bonds. However, it also coincides with bad news about long-term financial conditions in the form of higher risk premiums on long-term nominal bonds. Shocks to the rule correlate with changes in the yield curve' s level. Shocks to discretion correlate with changes in its slope.
Keywords: forward-looking models; identification; monetary policy; affine bond pricing
JEL Codes: E43; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Discretionary monetary policy (E60) | Aggregate risk (E10) |
| Discretionary easing (E52) | Lower inflation (E31) |
| Discretionary easing (E52) | Higher output growth (O49) |
| Discretionary easing (E52) | Lower risk premiums on short-term nominal bonds (E43) |
| Discretionary easing (E52) | Higher risk premiums on long-term nominal bonds (E43) |
| Shocks to the policy rule (E61) | Changes in the yield curve's level (E43) |
| Shocks to discretion (D80) | Changes in the yield curve's slope (E43) |
| Discretionary policy (E60) | Mean of risk premiums (G12) |
| Easing through the target rate (E43) | Bad news on long-term financial market conditions (G19) |
| Discretionary easing (E52) | Good news on short-term nominal bonds (E43) |
| Discretionary policy (E60) | Interest rate smoothness or inertia (E43) |