Long-term interest rates,risk premia and unconventional monetary policy |
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| Authors: | Callum Jones Mariano Kulish |
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| Affiliation: | 1. New York University, United States;2. University of New South Wales, Australian School of Business, Gate 2, High Street, Level 4, Sydney, New South Wales 2052, Australia;1. University of Pavia, Department of Economics and Quantitative Methods, Via S. Felice 5, 27100, Pavia, Italy;2. Banca d’Italia, Economic Outlook and Monetary Policy Department. Via Nazionale, 91, 00184, Rome, Italy;1. School of Finance, Southwestern University of Finance and Economics, 555 Liutai Avenue, Chengdu Sichuan, 611130, PR China;2. School of Finance, Zhongnan University of Economics and Law, 182 Nanhu Avenue, Wuhan, Hubei, 430073, PR China;3. Accounting and Finance Group, Crawford House, Alliance Manchester Business School, University of Manchester, Booth Street East, Manchester, M15 6PB, UK;4. School of Economics and Finance, Massey Business School, Massey University (Albany Campus), New Zealand;1. Poole College of Management, NC State University, 2801 Founders Drive, Raleigh, NC 27695, United States;2. RSFAS, Australian National University, Australia;3. Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213, United States |
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| Abstract: | We study two kinds of unconventional monetary policies: announcements about the future path of the short-term rate and long-term nominal interest rates as operating instruments of monetary policy. We do so in a model where the risk premium on long-term debt is, in part, endogenously determined. We find that both policies are consistent with unique equilibria, that, at the zero lower bound, announcements about the future path of the short-term rate can lower long-term interest rates through their impact both on expectations and on the risk premium and that long-term interest rate rules perform as well as, and at times better than, conventional Taylor rules. With simulations, we show that long-term interest rate rules generate sensible dynamics both when in operation and when expected to be applied. |
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| Keywords: | Unconventional monetary policy Taylor rule Risk premia Term structure E43 E52 E58 |
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