In this book, Andrew Harvey sets out to provide a unified and comprehensive theory of structural time series models. Unlike the traditional ARIMA models, structural time series models consist explicitly of unobserved components, such as trends and seasonals, which have a direct interpretation. As a result the model selection methodology associated with structural models is much closer to econometric methodology. The link with econometrics is made even closer by the natural way in which the models can be extended to include explanatory variables and to cope with multivariate time series. From the technical point of view, state space models and the Kalman filter play a key role in the statistical treatment of structural time series models. The book includes a detailed treatment of the Kalman filter. This technique was originally developed in control engineering, but is becoming increasingly important in fields such as economics and operations research. This book is concerned primarily with modelling economic and social time series, and with addressing the special problems which the treatment of such series poses. The properties of the models and the methodological techniques used to select them are illustrated with various applications. These range from the modellling of trends and cycles in US macroeconomic time series to to an evaluation of the effects of seat belt legislation in the UK.

Forecasting, Structural Time Series Models and the Kalman Filter

This paper employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. We show that such a model oers an excellent description of the data and can be used to summarize the macroeconomic eects of unconventional monetary policy at the zero lower bound. Our estimates imply that the eorts by the Federal Reserve to stimulate the economy since 2009 succeeded in making the unemployment rate in May 2013 0.23% lower than it otherwise would have been.

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Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound

This paper employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. We show that such a model offers an excellent description of the data compared to the benchmark model and can be used to summarize the macroeconomic effects of unconventional monetary policy. Our estimates imply that the efforts by the Federal Reserve to stimulate the economy since July 2009 succeeded in making the unemployment rate in December 2013 1% lower, which is 0.13% more compared to the historical behavior of the Fed.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2469299_code753937.pdf?abstractid=2321323&mirid=4

https://www.federalreserve.gov/pubs/ifdp/2013/1081/ifdp1081.pdf

Capital flows to emerging market economies: A brave new world?

/pdf/methods-of-policy-accommodation-at-the-interest-rate-lower-5d59gvepsi.pdf

Methods of Policy Accommodation at the Interest-Rate Lower Bound

People’s expectations for future income, interest rates, and inflation are important determinants of financial and economic outcomes. But these expectations are not observable. Surveys of the public or economic forecasters can provide some guidance, but they are published only monthly at best. Statistical estimates based on historical data are also useful but are subject to considerable model uncertainty.

/pdf/optimal-policy-and-market-based-expectations-2vcrmkjhez.pdf

Optimal Policy and Market-Based Expectations

Affine dynamic term structure models (DTSMs) are the standard finance representation of the yield curve. However, the literature on DTSMs has ignored the coefficient bias that plagues estimated autoregressive models of persistent time series. We introduce new simulation-based methods for reducing or even eliminating small-sample bias in empirical affine Gaussian DTSMs. With these methods, we show that conventional estimates of DTSM coefficients are severely biased, which results in misleading estimates of expected future short-term interest rates and long-maturity term premia. Our unbiased DTSM estimates imply risk-neutral rates and term premia that are more plausible from a macro-finance perspective.

Unbiased estimate of dynamic term structure models

With the federal funds rate, the traditional policy tool of the Federal Reserve, effectively reaching zero in late 2008, policymakers have turned to unconventional policy tools to further ease the stance of monetary policy (Williams 2011). These tools are aimed at lowering longer-term interest rates to stimulate economic activity and reduce unemployment. They can be grouped into two categories: communication and balance sheet policies. The Federal Open Market Committee (FOMC) has taken new communication initiatives by providing forward guidance about future policy. In August 2011, it started to explicitly lay out its expectations for the future path of the federal funds rate. The Fed’s unconventional balance sheet policies began in 2009 with a program of large-scale asset purchases (LSAPs) of Treasury and mortgage-backed securities, followed by further purchase programs. These purchases have been designed to put downward pressure on longer-term interest rates. Unconventional monetary policy actions can only be successful in stimulating the economy if they lower the interest rates that matter most for businesses and households, that is, the private borrowing rates that determine the cost of funds for the private sector. This Economic Letter reviews the Fed’s balance sheet programs, providing evidence about their impact on private borrowing rates, such as corporate bond yields and mortgage rates. To help understand the financial-market effects of these programs, the Letter examines the channels through which they likely have affected longer-term interest rates. It also looks at mortgage spreads, which capture the difference between the return to investors on mortgage bonds and mortgage costs to homeowners, focusing on factors that may limit pass-through to primary mortgage rates. Three rounds of asset purchases

Fed Asset Buying and Private Borrowing Rates

Obtaining monetary policy expectations from the yield curve is difficult near the zero lower bound (ZLB). Standard dynamic term structure models, which ignore the ZLB, can be misleading. Shadow-rate models are better suited for this purpose, because they account for the distributional asymmetry in projected short rates induced by the ZLB. Besides providing better interest rate fit and forecasts, our shadow-rate models deliver estimates of the future monetary policy liftoff from the ZLB that are closer to survey expectations. We also document significant improvements for inference about monetary policy expectations when macroeconomic factors are included in the term structure model.

Monetary Policy Expectations at the Zero Lower Bound

We estimate time-varying perceptions about the Fed’s monetary policy rule from crosssectional survey data and document systematic shifts in the perceived rule that are relevant for monetary policy and asset pricing. First, the perceived reaction coefficient to the output gap varies over the monetary policy cycle, with a pattern of quick and surprising rate cuts but gradual and data-dependent tightening. Second, this variation in the perceived rule explains changes in the sensitivity of interest rates to macroeconomic announcements. Third, high-frequency monetary policy surprises lead to updates in beliefs about the policy rule that depend on the state of the economy in the direction that is consistent with rational learning. Fourth, when monetary policy is perceived to be more responsive to real activity, risk premia on long-term Treasury bonds are low, consistent with standard asset pricing logic. Our findings can help explain certain empirical puzzles, such as systematic forecast errors about short-term interest rates and the decoupling of long-term rates during conundrum episodes.

Michael D. Bauer

Papers

Optimal Policy and Market-Based Expectations

Unbiased estimate of dynamic term structure models

Fed Asset Buying and Private Borrowing Rates

Monetary Policy Expectations at the Zero Lower Bound

Perceptions about Monetary Policy