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Title: Monetary policy risk: Rules vs. discretion

Author(s): David Backus, Mikhail Chernov, Stanley E. Zin and Irina Zviadadze

Publication Date: August 2013

Keyword(s): affine bond-pricing, forward-looking models, identification and monetary policy

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: Long-run asset-pricing restrictions in a macro term-structure model identify discretionary monetary policy separately from a policy rule. We find that policy discretion is an important contributor to aggregate risk. In addition, discretionary easing coincides with good news about the macroeconomy in the form of lower inflation, higher output growth, and lower risk premiums on short-term nominal bonds. However, it also coincides with bad news about long-term financial conditions in the form of higher risk premiums on long-term nominal bonds. Shocks to the rule correlate with changes in the yield curve' s level. Shocks to discretion correlate with changes in its slope

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Bibliographic Reference

Backus, D, Chernov, M, Zin, S and Zviadadze, I. 2013. 'Monetary policy risk: Rules vs. discretion'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9611