Search Results
Working Paper
International channels of the Fed’s unconventional monetary policy
Previous research has established that the Federal Reserve large scale asset purchases (LSAPs) significantly influenced international bond yields. This paper analyzes the channels through which these effects occurred. We use dynamic term structure models to decompose international yield changes into changes in term premia and expected short rates. The conclusions for most countries are model dependent. Models that impose a unit root tend to imply large signaling effects for Australia, Canada, Germany and the United States. Models that do not restrict persistence imply negligible signaling ...
Working Paper
The signaling channel for Federal Reserve bond purchases
Previous research has emphasized the portfolio balance effects of Federal Reserve bond purchases, in which a reduced bond supply lowers term premia. In contrast, we find that such purchases have important signaling effects that lower expected future short term interest rates. Our evidence comes from dynamic term structure models that decompose declines in yields following Fed announcements into changes in risk premia and expected short rates. To overcome problems in measuring term premia, we consider unbiased model estimation and restricted risk price estimation. We also characterize the ...
Working Paper
Green Stocks and Monetary Policy Shocks: Evidence from Europe
Policymakers and researchers worry that the low-carbon transition may be inadvertently delayed by higher global interest rates. To examine whether green investment is especially sensitive to interest rate increases, we consider the effect of unanticipated monetary policy changes on the equity prices of green and brown European firms. We find that brown firms, measured in terms of carbon emission levels or intensities, are more negatively affected than green firms by tighter monetary policy. This heterogeneity is robust to different monetary policy surprises, emission measures, econometric ...
Journal Article
Options-based expectations of future policy rates
Forecasts of short-term interest rates that are based on futures rates in financial markets can be very misleading when the policy rate is near the zero lower bound. By contrast, options on future short-term interest rates can provide more accurate projections. Currently these options suggest that the federal funds rate?the Federal Reserve?s key monetary policy interest rate?is most likely to lift off from zero around mid-2015 and rise only slowly afterwards at a pace of about 1 percentage point per year.
Journal Article
Information in the Yield Curve about Future Recessions
The ability of the Treasury yield curve to predict future recessions has recently received a great deal of public attention. An inversion of the yield curve?when short-term interest rates are higher than long-term rates?has been a reliable predictor of recessions. The difference between ten-year and three-month Treasury rates is the most useful term spread for forecasting recessions?without any adjustment for an estimate of the underlying term premium. However, such correlations in the data do not identify cause and effect, which complicates their interpretation.
Journal Article
Monetary policy and interest rate uncertainty
Market expectations about the Federal Reserve?s policy rate involve both the future path of that rate and the uncertainty surrounding that path. Fed policy actions have historically been preceded by high levels of uncertainty, which decline after the policy is made public. Recently, measures of near-term interest rate uncertainty have fallen to historical lows, due partly to a Fed policy rate near zero. Unconventional monetary policies have substantially lowered both expectations and uncertainty about the future path of the Fed?s policy rate.
Working Paper
Inflation Expectations and the News
This paper provides new evidence on the importance of inflation expectations for variation in nominal interest rates, based on both market-based and survey-based measures of inflation expectations. Using the information in TIPS breakeven rates and inflation swap rates, I document that movements in inflation compensation are important for explaining variation in long-term nominal interest rates, both unconditionally as well as conditionally on macroeconomic data surprises. Daily changes in inflation compensation and changes in long-term nominal rates generally display a close statistical ...
Working Paper
Resolving the spanning puzzle in macro-finance term structure models
Previous macro-finance term structure models (MTSMs) imply that macroeconomic state variables are spanned by (i.e., perfectly correlated with) model-implied bond yields. However, this theoretical implication appears inconsistent with regressions showing that much macroeconomic variation is unspanned and that the unspanned variation helps forecast excess bond returns and future macroeconomic fluctuations. We resolve this contradiction?or ?spanning puzzle??by reconciling spanned MTSMs with the regression evidence, thus salvaging the previous macro-finance literature. Furthermore, we ...
Working Paper
Interest Rates Under Falling Stars
Macro-finance theory implies that trend inflation and the equilibrium real interest rate are fundamental determinants of the yield curve. However, empirical models of the terms structure of interest rates generally assume that these fundamentals are constant. We show that accounting for time variation in these underlying long-run trends is crucial for understanding the dynamics of Treasury yields and predicting excess bond returns. We introduce a new arbitrage-free model that captures the key role that long-run trends play for interest rates. The model also provides new, more plausible ...
Working Paper
Monetary Policy Expectations at the Zero Lower Bound
Obtaining monetary policy expectations from the yield curve is difficult near the zero lower bound (ZLB). Standard dynamic term structure models, which ignore the ZLB, can be misleading. Shadow-rate models are better suited for this purpose, because they account for the distributional asymmetry in projected short rates induced by the ZLB. Besides providing better interest rate fit and forecasts, our shadow-rate models deliver estimates of the future monetary policy liftoff from the ZLB that are closer to survey expectations. We also document significant improvements for inference about ...