Essays in Monetary Policy and Asset Pricing

The estimated yield-curve model explains the “snake-shaped” term structure of volatility in yields, based on interest-rate smoothing and policy inertia. Macroeconomic surprises are only temporary components of macro variables. This means that the impact of these surprises on longer yields needs to occur over time through a “policy-inertia factor.” The model improves the fit of bond prices over a 3-latent-factor model, especially for short maturities. A policy rule is identified from weekly yield data and is found to provide a good description of the target. In fact, model-based forecasts of future target rates outperform several benchmarks.

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