Refet S. Gürkaynak

Bio: Refet S. Gürkaynak is an academic researcher from Bilkent University. The author has contributed to research in topics: Monetary policy & Inflation. The author has an hindex of 31, co-authored 76 publications receiving 8162 citations. Previous affiliations of Refet S. Gürkaynak include Institute for the Study of Labor.

Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements

Abstract: We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor-changes in the federal funds rate target - and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a "current federal funds rate target" factor and a "future path of policy" factor, with the latter closely associated with Federal Open Market Committee statements.We measure the effects of these two factors on bond yields and stock prices using a new intraday data set going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.

The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models

Abstract: Current macroeconomic models provide appealing, succinct descriptions of business cycle dynamics in the United States and other countries, but less is known about the extent to which these models accurately replicate the economy’s long-run characteristics. In part, this reflects that economists have far fewer observations about long-run behavior, given the limited sample sizes available. But while less is known about the long-run characteristics of the economy, many macroeconomic models impose very strong assumptions about this behavior— that the long-run levels of inflation and the real interest rate are constant over time and perfectly known by all economic agents. This paper empirically tests those assumptions and proposes alternative ones. Specifically, we focus on the effects of macroeconomic and monetary policy surprises on the term structure of interest rates. In many standard macroeconomic models, short-term interest rates tend to return relatively quickly to a deterministic steady state after a macroeconomic or monetary policy shock, so that these shocks have only transitory effects on the future path of interest rates. As a result, one would expect only a limited response of long-term interest rates to these disturbances. Putting this prediction in terms of forward rates, one would expect virtually no reaction of far-ahead forward rates to such shocks. The behavior of the U.S. yield curve appears, however, to contrast sharply with these predictions. In particular, we demonstrate that longterm forward rates move significantly in response to the unexpected components of many macroeconomic data releases and monetary policy announcements. We interpret these findings as indicating that an assumption made in these models—that the long-run expectations of economic agents are precise and time-invariant—is violated. In particular, our empirical results are all consistent with a model that we present in which private agents’ views of long-run inflation are not strongly anchored.

Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. The U.S. Treasury Yield Curve: 1961 to the Present

Abstract: The discount function, which determines the value of all future nominal payments, is the most basic building block of finance and is usually inferred from the Treasury yield curve. It is therefore surprising that researchers and practitioners do not have available to them a long history of high-frequency yield curve estimates. This paper fills that void by making public the Treasury yield curve estimates of the Federal Reserve Board at a daily frequency from 1961 to the present. We use a well-known and simple smoothing method that is shown to fit the data very well. The resulting estimates can be used to compute yields or forward rates for any horizon. We hope that the data, which are posted on the website, and which will be updated periodically, will provide a benchmark yield curve that will be useful to applied economists.

Do actions speak louder than words? the response of asset prices to monetary policy actions and statements

Abstract: We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor-changes in the federal funds rate target - and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a "current federal funds rate target" factor and a "future path of policy" factor, with the latter closely associated with Federal Open Market Committee statements.We measure the effects of these two factors on bond yields and stock prices using a new intraday data set going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.

Online Appendix to: The Next Generation of the Penn World Table*

Abstract: We describe the theory and practice of real GDP comparisons across countries and over time. Effective with version 8, the Penn World Table (PWT) will be taken over by the University of California, Davis and the University of Groningen, with continued input from Alan Heston at the University of Pennsylvania. Version 8 will expand on previous versions of PWT in three respects. First, it will distinguish real GDP on the expenditure side from real GDP on the output side, which differ by the terms of trade faced by countries. Second, it will distinguish growth rates of GDP based on national accounts data from growth rates that are benchmarked in multiple years to cross-country price data. Third, data on capital stocks will be reintroduced. Some illustrative results from PWT version 8 are discussed, including new results that show how the Penn effect is not emergent but a stable relationship over time.

The Next Generation of the Penn World Table

Abstract: We describe the theory and practice of real GDP comparisons across countries and over time. Effective with version 8, the Penn World Table (PWT) will be taken over by the University of California, Davis and the University of Groningen, with continued input from Alan Heston at the University of Pennsylvania. Version 8 will expand on previous versions of PWT in three respects. First, it will distinguish real GDP on the expenditure side from real GDP on the output side, which differ by the terms of trade faced by countries. Second, it will distinguish growth rates of GDP based on national accounts data from growth rates that are benchmarked in multiple years to cross-country price data. Third, data on capital stocks will be reintroduced. Some illustrative results from PWT version 8 are discussed, including new results that show how the Penn effect is not emergent but a stable relationship over time.

The Zero Bound on Interest Rates and Optimal Monetary Policy

Abstract: THE CONSEQUENCES FOR THE PROPER conduct of monetary policy of the existence of a lower bound of zero for overnight nominal interest rates has recently become a topic of lively interest. In Japan the call rate (the overnight cash rate analogous to the federal funds rate in the United States) has been within 50 basis points of zero since October 1995, and it has been essentially equal to zero for most of the past four years (figure 1). Thus the Bank of Japan has had little room to further reduce short-term nominal interest rates in all that time. Meanwhile Japan's growth has remained anemic, and prices have continued to fall, suggesting a need for monetary stimulus. Yet the usual remedy--lower short-term nominal interest rates--is plainly unavailable. Vigorous expansion of the monetary base has also seemed to do little to stimulate demand under these circumstances: as figure l also shows, the monetary base is now more than twice as large, relative to GDP, as it was in the early 1990s. [FIGURE 1 OMITTED] In the United States, meanwhile, the federal funds rate has now been reduced to only 1 percent, and signs of recovery remain exceedingly fragile. This has led many to wonder if this country might not also soon find itself in a situation where interest rate policy is no longer available as a tool for macroeconomic stabilization. A number of other countries face similar questions. John Maynard Keynes first raised the question of what can be done to stabilize the economy when it has fallen into a liquidity trap--when interest rates have fallen to a level below which they cannot be driven by further monetary expansion--and whether monetary policy can be effective at all under such circumstances. Long treated as a mere theoretical curiosity, Keynes's question now appears to be one of urgent practical importance, but one with which theorists have become unfamiliar. The question of how policy should be conducted when the zero bound is reached--or when the possibility of reaching it can no longer be ignored--raises many fundamental issues for the theory of monetary policy. Some would argue that awareness of the possibility of hitting the zero bound calls for fundamental changes in the way policy is conducted even before the bound has been reached. For example, Paul Krugman refers to deflation as a "black hole," (1) from which an economy cannot expect to escape once it has entered. A conclusion often drawn from this pessimistic view of the efficacy of monetary policy in a liquidity trap is that it is vital to steer far clear of circumstances in which deflationary expectations could ever begin to develop--for example, by targeting a sufficiently high positive rate of inflation even under normal circumstances. Others are more sanguine about the continuing effectiveness of monetary policy even when the zero bound is reached, For example, it is often argued that deflation need not be a black hole, because monetary policy can affect aggregate spending, and hence inflation, through channels other than central bank control of short-term nominal interest rates. Thus there has been much recent discussion, with respect to both Japan and the United States--of the advantages of vigorous expansion of the monetary base even without any further reduction in interest rates, of the desirability of attempts to shift longer-term interest rates through central bank purchases of longer-maturity government securities, and even of the desirability of central bank purchases of other kinds of assets. Yet if these views are correct, they challenge much of the recent conventional wisdom regarding the conduct of monetary policy, both within central banks and among academic monetary economists. That wisdom has stressed a conception of the problem of monetary policy in terms of the appropriate adjustment of an operating target for overnight interest rates, and the prescriptions formulated for monetary policy, such as the celebrated Taylor rule, (2) are typically cast in these terms. …

Credit Spreads and Business Cycle Fluctuations

Abstract: We re-examine the evidence on the relationship between credit spreads and economic activity, by constructing a credit spread index based on an extensive data set of prices of outstanding corporate bonds trading in the secondary market. Compared with the standard default-risk indicators, our credit spread index is a robust predictor of economic activity at both the short- and longer-term horizons. Using an empirical framework, we decompose the index into a predictable component that captures the available firm-specific information on expected defaults and a residual component—the excess bond premium—which we argue likely reflects variation in the price of default risk rather than variation in the risk of default. Our results indicate that the predictive content of credit spreads for economic activity is due primarily to movements in the excess bond premium. Innovations in the excess bond premium that are orthogonal to the current state of the economy are shown to lead to significant declines in economic activity and equity prices. We also show that a deterioration in the creditworthiness of broker-dealers—key financial intermediaries in the corporate cash market—causes an increase in the excess bond premium. These findings support the notion that a rise in the excess bond premium represents a reduction in the e!ective risk-bearing capacity of the financial sector and, as a result, a contraction in the supply of credit with significant adverse consequences for the macroeconomy.