Heterogeneous Information About the Term Structure of Interest Rates, Least-Squares Learning and Optimal Interest Rate Rules for Inflation Targeting (original) (raw)
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2004
Heterogenous Information About the Term Structure of Interest Rates, Least-Squares Learning and Optimal Interest Rate Rules* In this Paper we incorporate the term structure of interest rates in a standard inflation forecast targeting framework. Learning about the transmission process of monetary policy is introduced by having heterogeneous agentsi.e. the central bank and private agents -who have different information sets about the future sequence of short-term interest rates. We analyse inflation forecast targeting in two environments. One in which the central bank has perfect knowledge, in the sense that it understands and observes the process by which private sector interest rate expectations are generated, and one in which the central bank has imperfect knowledge and has to learn the private sector forecasting rule for short-term interest rates. In the case of imperfect knowledge, the central bank has to learn about private sector interest rate expectations, as the latter affect the impact of monetary policy through the expectations theory of the term structure of interest rates. Here, following Evans and Honkapohja , the learning scheme we investigate is that of least-squares learning (recursive OLS) using the Kalman filter. We find that optimal monetary policy under learning is a policy that separates estimation and control. Therefore, this model suggests that the practical relevance of the breakdown of the separation principle and the need for experimentation in policy may be limited.
Learning About the Term Structure and Optimal Rules for Inflation Targeting
European Journal of Operational Research, 2006
In this paper we incorporate the term structure of interest rates in a standard inflation forecast targeting framework. We find that under flexible inflation targeting and uncertainty in the degree of persistence in the economy, allowing for active learning possibilities has effects on the optimal interest rate rule followed by the central bank. For a wide range of possible initial beliefs about the unknown parameter, the dynamically optimal rule is in general more activist, in the sense of responding aggressively to the state of the economy, than the myopic rule for small to moderate deviations of the state variable from its target. On the other hand, for large deviations, the optimal policy is less activist than the myopic and the certainty equivalence policies.
Learning, Macroeconomic Dynamics, and the Term Structure of Interest Rates
Asset Prices and Monetary Policy, 2008
We present a macroeconomic model in which agents learn about the central bank's inflation target and the output-neutral real interest rate. We use this framework to explain the joint dynamics of the macroeconomy, and the term structures of interest rates and inflation expectations. Introducing learning in the macro model generates endogenous stochastic endpoints which act as level factors for the yield curve. These endpoints are sufficiently volatile to account for most of the variation in long-term yields and inflation expectations. As such, this paper complements the current macro-finance literature in explaining long-term movements in the term structure without reference to additional latent factors.
The term structure of interest rates and inflation forecast targeting
South African Journal of Economic and Management Sciences
This paper examines the implications of the expectations theory of the term structure of interest rates for the implementation of inflation targeting. We show that the responsiveness of the central bank’s instrument to the underlying state of the economy is increasing in the duration of the long-term bond. On the other hand, an increase in duration will make long-term inflationary expectations - and therefore also the long-term nominal interest rate - less responsive to the state of the economy. The extent to which the central bank is concerned with output stabilisation will exert a moderating influence on the central bank’s response to leading indicators of future inflation. However, the effect of an increase in this parameter on the long-term nominal interest rate turns out to be ambiguous. Next, we show that both the sensitivity of the nominal term spread to economic fundamentals and the extent to which the spread predicts future output, are increasing in the du...
Interpretation of the information content of the term structure of interest rates
2014
The objective of this paper is to analyse the information content of the term structure of interest rates in Belgium. It is, however, well known that the intermediate target of Belgian monetary policy is the stabilisation of the DM/BF exchange rate. This type of policy has produced close links between Belgian and German interest rates and therefore between both countries' term structures. Hence, the analysis of the Belgian term structure cannot be isolated from what happens in Germany and our analysis is therefore extended to include the information content of the term structure of German interest rates as well.
Simple Guidelines for Interest Rate Policy
clsbe.lisboa.ucp.pt
Those of us working at research departments in central banks are regularly questioned on the right target for the interest rate in the inter-bank market. For many of us this is not an easy question, since the models are not unanimous and the information on the true model of ...
Optimal Constrained Interest-Rate Rules
Journal of Money, Credit and Banking, 2007
We show that if policymakers compute the optimal unconstrained interest-rate rule within a Taylor-type class, they may be led to rules that generate indeterminacy and/or instability under learning. This problem is compounded by uncertainty about structural parameters since an optimal rule that is determinate and stable under learning for one calibration may be indeterminate or unstable under learning under a different calibration. We advocate a procedure in which policymakers restrict attention to rules constrained to lie in the determinate learnable region for all plausible calibrations, and that minimize the expected loss, computed using structural parameter priors, subject to this constraint.
Optimal Interest-Rate Rules: I. General Theory
2003
This paper proposes a general method for deriving an optimal monetary policy rule in the case of a dynamic linear rational-expectations model and a quadratic objective function for policy. A commitment to a rule of the type proposed results in a determinate equilibrium in which the responses to shocks are optimal. Furthermore, the optimality of the proposed policy rule is independent of the specification of the stochastic disturbances. Finally, the proposed rules can be justified from a "timeless perspective," so that commitment to such a rule need not imply timeinconsistent policy. We show that under fairly general conditions, optimal policy can be represented by a generalized Taylor rule, in which however the relation between the interest-rate instrument and the other target variables is not purely contemporaneous, as in Taylor's specification. We also offer general conditions under which optimal policy can be represented by a "super-inertial" interest-rate rule, and under which it can be represented by a pure "targeting rule" that makes no explicit reference to the path of the instrument.
Optimal Interest-Rate Rules: II. Applications
2003
In this paper we calculate robustly optimal monetary policy rules for several variants of a simple optimizing model of the monetary transmission mechanism with sticky prices and/or wages. We discuss representations of optimal policy both in terms of interest-rate feedback rules that generalize the well-known Taylor rule,' and in terms of commitment to a target criterion of the kind discussed in familiar proposals for flexible inflation targeting.' Optimal rules, however, require that policy be history-dependent in ways not contemplated by many well-known proposals. We furthermore find that a robustly optimal policy rule is almost inevitably an implicit rule, that requires the central bank to use a structural model to project the economy's evolution under the contemplated policy action. Finally, our numerical examples suggest that optimal rules do not place nearly as much weight on projections of inflation or output many quarters in the future as occurs under the curre...