No-arbitrage Taylor rules
By: Andrew Ang, Sen Dong, Monika Piazzesi.
Contributors: Dong, Sen, 1977-; Piazzesi, Monika.; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 13448.; Working paper series (National Bureau of Economic Research) -- working paper no. 13448.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 49
Subjects: Monetary policy -- Mathematical models
Description: 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: "September 2007."

Includes bibliographical references (p. 34-35)

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