Comment on "Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset"
Unpublished manuscript :: With Rudebusch and Wu :: September 2012
Term premia implied by maximum likelihood estimates of affine term structure models are misleading because of small-sample bias. We show that accounting for this bias alters the conclusions about the trend, cycle, and macroeconomic determinants of the term premia estimated in Wright (2011). His term premium estimates are essentially acyclical, and often just parallel the secular trend in long-term interest rates. In contrast, bias-corrected term premia show pronounced countercyclical behavior, consistent with theoretical and empirical arguments about movements in risk premia.
Inflation Expectations and the News
Unpublished manuscript :: February 2012
This paper provides new evidence on the importance of inflation expectations for high-frequency variation in long-term nominal interest rates, based on both market-based measures from TIPS and swaps markets and survey-based measures of inflation expectations. Daily changes in break-even inflation and changes in nominal rates generally display a close statistical relationship, with the exception of the recent financial crisis, and the sensitivity of break-even inflation to macroeconomic data surprises explains a sizable share of the macro response of nominal rates. Various survey-based measures of inflation expectations exhibit statistically and economically significant responses to macro news. These findings are consistent with expectations formation according to estimated policy rules in which the Taylor principle holds and variation in inflation explains most of the variation in the policy rate.
International Channels of the Fed's Unconventional Monetary Policy
2012-12 :: With Neely :: February 2013
Previous research has established that the Federal Reserve's large scale asset purchases (LSAPs) significantly influenced international bond yields. This paper uses dynamic term structure models to decompose international yield changes into changes in expected short-term interest rates and term premia, which sheds light on the channels through which the LSAP effects occurred. We find that LSAPs had substantial signaling effects for the US and Canada: Changes in expected future policy rates contributed significantly to lower long-term yields. The signaling effect on Canadian rates is intuitively attractive because conventional US monetary policy shocks have historically strongly influenced Canadian interest rates. For Australia and Germany, we find more mixed evidence for signaling effects. The evidence for Japan suggests that portfolio balance effects were the dominant driver of more modest LSAP effects. The absence of signaling effects for Japanese rates is consistent with their relative insensitivity to conventional US monetary policy shocks.
The Signaling Channel for Federal Reserve Bond Purchases
2011-21 :: With Rudebusch :: August 2012
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 a model-free analysis and 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 bias-corrected model estimation and restricted risk price estimation. We also characterize the estimation uncertainty regarding the relative importance of the signaling and portfolio balance channels.
Nominal Interest Rates and the News
2011-20 :: August 2011
How do interest rates react to news? This paper presents a new methodology, based on a simple dynamic term structure model, which provides for an integrated analysis of the effects of monetary policy actions and macroeconomic news on the term structure of interest rates. I find several new empirical results: First, monetary policy directly affects distant forward rates. Second, policy news is more complex than macro news. Third, while payroll news causes the most action in interest rates, it does not affect distant forward rates. Fourth, the term structure response to macro news is consistent with considerable interest rate smoothing.
Bayesian Estimation of Dynamic Term Structure Models under Restrictions on Risk Pricing
2011-03 :: November 2011
This paper performs Bayesian estimation of affine Gaussian dynamic term structure models (DTSMs) in which the risk price parameters are restricted. A new econometric framework for DTSM estimation allows the researcher to select plausible constraints from a large set of restrictions, to correctly quantify statistical uncertainty, and to incorporate model uncertainty. The main empirical result is that under the restrictions favored by the data the expectations component, and not the term premium, accounts for the majority of high-frequency movements of long-term interest rates. At lower frequencies, term premia are counter-cyclical and more stable than implied by DTSMs without risk price restrictions.
Correcting Estimation Bias in Dynamic Term Structure Models
Journal of Business and Economic Statistics 30(3), July 2012, 454-467 :: With Rudebusch and Wu
The affine dynamic term structure model (DTSM) is the canonical empirical finance representation of the yield curve. However, the possibility that DTSM estimates may be distorted by small-sample bias has been largely ignored. We show that conventional estimates of DTSM coefficients are indeed severely biased, and this bias results in misleading estimates of expected future short-term interest rates and of long-maturity term premia. We provide a variety of bias-corrected estimates of affine DTSMs, both for maximally-flexible and over-identified specifications. Our estimates imply short rate expectations and term premia that are more plausible from a macro-finance perspective.
Testing for Endogenous Growth
In Master's Thesis :: Germany: VDM Publishing, 2004
Models of endogenous growth have strong empirical predictions about the determinants of technological progress. This thesis details the implications of alternative R&D-based endogenous growth models, and then surveys the empirical literature that tests different aspects of this New Growth Theory. Numerous studies attempt to test the validity of endogenous growth models but come to very different conclusions, since varying hypotheses are considered. There are few rigorous and plausible empirical assessments of whether the determinants of technological progress conform to the predictions of the theory. I provide new evidence on the relevance of R&D intensity for economic growth, using dynamic panel data methods, thereby contributing to the empirical literature that finds support for R&D-based endogenous growth models.