No-Arbitrage Taylor Rules / Andrew Ang, Sen Dong, Monika Piazzesi.

Format:

Book

Author/Creator:

Ang, Andrew.

Contributor:

National Bureau of Economic Research.

Dong, Sen.

Piazzesi, Monika.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13448.

NBER working paper series no. w13448

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

We estimate Taylor (1993) rules and identify monetary policy shocks using no-arbitrage pricing techniques. Long-term interest rates are risk-adjusted expected values of future short rates and thus provide strong over-identifying restrictions about the policy rule used by the Federal Reserve. The no-arbitrage framework also accommodates backward-looking and forward-looking Taylor rules. We find that inflation and output gap account for over half of the variation of time-varying excess bond returns and most of the movements in the term spread. Taylor rules estimated with no-arbitrage restrictions differ from Taylor rules estimated by OLS, and the resulting monetary policy shocks are somewhat less volatile than their OLS counterparts.

Notes:

Print version record

September 2007.