Working Paper: NBER ID: w28983
Authors: David Backus; Mikhail Chernov; Stanley E. 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 discretion is 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: Monetary Policy; Discretion; Financial Markets; Risk
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 (O40) |
| discretionary monetary policy (E60) | 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) |