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Author:Wu, Tao 

Working Paper
Monetary policy and the slope factor in empirical term structure estimations

This paper examines the empirical relationship between the movement of the slope factor in term structure of nominal interest rates and exogenous monetary-policy shocks in the U.S. after 1982. Using first a six-variable VAR model and then a GMM estimation model of the "Taylor rule," I estimate the exogenous monetary-policy shocks implied by each of them in the U.S. during this period. Meanwhile, a two-factor model is used to extract the underlying slope factor of the term structure. Results from the correlation study suggest that there is strong correlation between the slope factor and ...
Working Paper Series , Paper 2002-07

Working Paper
Macro factors and the affine term structure of interest rates

I formulate an affine term structure model of bond yields from a general equilibrium business-cycle model, with observable macro state variables of the structural economy as the factors. The factor representing monetary policy is strongly mean-reverting, and its influence on the term structure is primarily through changing the slope of the yield curve. The factor representing technology is more persistent, and it affects the term structure by shifting the level of the yield curve. The dynamic implications of the model for the macro economy and the term structure are consistent with the broad ...
Working Paper Series , Paper 2002-06

Working Paper
The bond yield \\"conundrum\\" from a macro-finance perspective

In 2004 and 2005, long-term interest rates remained remarkably low despite improving economic conditions and rising short-term interest rates, a situation that former Fed Chairman Alan Greenspan dubbed a "conundrum." We document the extent and timing of this conundrum using two empirical no-arbitrage macro-finance models of the term structure of interest rates. These models confirm that the recent behavior of long-term yields has been unusual--that is, it cannot be explained within the framework of the models. Therefore, we consider other macroeconomic factors omitted from the models and ...
Working Paper Series , Paper 2006-16

Working Paper
Measuring oil-price shocks using market-based information

We develop two measures of exogenous oil-price shocks for the period 1984 to 2006 based on market commentaries on daily oil-price fluctuations. Our measures are based on exogenous events that trigger substantial fluctuations in spot oil prices and are constructed to be free of endogenous and anticipatory movements. We find that the dynamic responses of output and prices implied by these measures are "well behaved." We also find that the response of output is larger than the one implied by a conventional measure of oil-price shocks proposed in the literature.
Working Paper Series , Paper 2006-28

Working Paper
Time varying equilibrium real rates and monetary policy analysis

Although it is generally recognized that the equilibrium real interest rate (ERR) varies over time, most recent work on policy analysis has been carried out under the assumption that this rate is constant. We show how this assumption can affect inferences about the conduct of policy in two different areas. First, if the ERR moves in the same direction as the trend growth rate (as is suggested by theory), the probability that an unperceived change in trend growth will lead to a substantial change in inflation is noticeably lower than is suggested by recent analyses (of inflation in the 1970s, ...
Working Paper Series , Paper 2004-10

Working Paper
A macro-finance model of the term structure, monetary policy, and the economy

This paper develops and estimates a macro-finance model that combines a canonical affine no-arbitrage finance specification of the term structure with standard macroeconomic aggregate relationships for output and inflation. From this new empirical formulation, we obtain several important results: (1) the latent term structure factors from finance no-arbitrage models appear to have important macroeconomic and monetary policy underpinnings, (2) there is no evidence of monetary policy inertia or a slow partial adjustment of the policy interest rate by the Federal Reserve, and (3) both ...
Working Paper Series , Paper 2003-17

Working Paper
The recent shift in term structure behavior from a no-arbitrage macro-finance perspective

This paper examines a recent shift in the dynamics of the term structure and interest rate risk. We first use standard yield-spread regressions to document such a shift in the U.S. in the mid-1980s. Over the pre- and post-shift subsamples, we then estimate dynamic, affine, no-arbitrage models, which exhibit a significant difference in behavior that can be largely attributed to changes over time in the pricing of risk associated with a ?level? factor. Finally, we suggest a link between the shift in term structure behavior and changes in the risk and dynamics of the inflation target as ...
Working Paper Series , Paper 2004-25

Working Paper
Stylized facts on nominal term structure and business cycles: an empirical VAR study

This paper examines the importance of various macroeconomic shocks in explaining the movement of the term structure of nominal bond yields in the post-war U.S., as well as the channels through which such macro shocks influence the yield curve, using a structural Vector Autoregressive (VAR) model. The results show that the monetary-policy and the aggregate-supply shocks are important determinants of the nominal term structure. Moreover, the monetary-policy innovations have a large but transitory effect on the nominal bond yields, primarily by changing the slope of the yield curve, and the ...
Working Paper Series , Paper 2002-08

Working Paper
Measuring oil-price shocks using market-based information

We study the effects of oil-price shocks on the U.S economy combining narrative and quantitative approaches. After examining daily oil-related events since 1984, we classify them into various event types. We then develop measures of exogenous shocks that avoid endogeneity and predictability concerns. Estimation results indicate that oil-price shocks have had substantial and statistically significant effects during the last 25 years. In contrast, traditional VAR approaches imply much weaker and insignificant effects for the same period. This discrepancy stems from the inability of VARs to ...
Working Papers , Paper 0905

Working Paper
Regulation and the neo-Wicksellian approach to monetary policy

Laubach and Williams (2003) employ a Kalman filter approach to jointly estimate the neutral real federal funds rate and trend output growth using an IS relationship and an output gap based inflation equation. They find a positive link between these two variables, but also much error surrounding neutral real rate estimates. We modify their approach by including variables for regulations on deposit interest rates and on wages and prices. These variables are statistically significant and notably affect estimates of two policy relevant coefficients: the sensitivity of output to the real interest ...
Working Papers , Paper 0807

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