Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/79422
Authors: 
Jordá, Oscar
Salyer, Kevin D.
Year of Publication: 
2001
Series/Report no.: 
Working Papers, University of California, Davis, Department of Economics 01-6
Abstract: 
This paper shows that greater uncertainty about monetary policy can lead to a decline in nominal interest rates. In the context of a limited participation model, monetary policy uncertainty is modeled as a mean-preserving spread in the distribution for the money growth process. This increase in uncertainty lowers the yield on short-term maturity bonds because the household sector responds by increasing liquidity in the banking sector. Long-term maturity bonds also have lower yields but this decrease is a result of the effect that greater uncertainty has on the nominal intertemporal rate of substitution - which is a convex function of money growth. These predictions are broadly supported by the data: the conditional variance of monetary policy shocks identified from a conventional monetary VAR negatively affects the yields of federal funds, and the three and six-month treasury bills.
Subjects: 
limited participation
term structure
time-varying uncertainty
JEL: 
E4
E5
E2
Document Type: 
Working Paper

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