Jing Cynthia Wu

The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment

This paper reviews alternative options for monetary policy when the short-term interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates. We use a model of risk-averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level, slope and curvature term-structure risk. We find these Treasury factors historically were quite helpful for predicting both yields and excess returns over 1990-2007. The historical correlations are consistent with the claim that if in December of 2006, the Fed were to have sold off all its Treasury holdings of less than one-year maturity (about

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

400 billion) and use the proceeds to retire Treasury debt from the long end, this might have resulted in a 14-basis-point drop in the 10-year rate and an 11-basis-point increase in the 6-month rate. We also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009. Our estimates imply that at the zero lower bound, such a maturity swap would have the same effects as buying

Correcting Estimation Bias in Dynamic Term Structure Models

400 billion in long-term maturities outright with newly created reserves, and could reduce the 10-year rate by 13 basis points without raising short-term yields. (This abstract was borrowed from another version of this item.)

EFFECTS OF INDEX-FUND INVESTING ON COMMODITY FUTURES PRICES: COMMODITY FUTURES PRICES

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.

Bond Risk Premia in Consumption-Based Models

The affine dynamic term structure model (DTSM) is the canonical empirical finance representation of the yield curve. However, the possibility that DTSM estimates may be distorted by small-sample bias has been largely ignored. We show that conventional estimates of DTSM coefficients are indeed severely biased, and this bias results in misleading estimates of expected future short-term interest rates and of long-maturity term premia. We provide a variety of bias-corrected estimates of affine DTSMs, for both maximally flexible and overidentified specifications. Our estimates imply interest rate expectations and term premia that are more plausible from a macrofinance perspective. This article has supplementary material online.

MONETARY POLICY UNCERTAINTY AND ECONOMIC FLUCTUATIONS: MONETARY POLICY UNCERTAINTY AND ECONOMIC FLUCTUATIONS

We develop a simple model of futures arbitrage that implies that if purchases by commodity index funds influence futures prices, then the notional positions of the index investors should help predict excess returns in these contracts. We find no evidence that the positions of index traders in agricultural contracts as identified by the Commodity Futures Trading Commission can help predict returns on the near futures contracts. Although there is some support that these positions might help predict changes in oil futures prices over 2006–2009, the relation breaks down out of sample.

Monetary Policy Uncertainty and Economic Fluctuations

Workhorse Gaussian affine term structure models (ATSMs) attribute time-varying bond risk premia entirely to changing prices of risk, while structural models with recursive preferences credit it completely to stochastic volatility. We reconcile these competing channels by introducing a novel form of external habit into an otherwise standard model with recursive preferences. The new model has an ATSM representation with analytical bond prices making it empirically tractable. We find that time variation in bond term premia is predominantly driven by the price of risk, especially, the price of expected inflation risk that co-moves with expected inflation itself.

A Shadow Rate New Keynesian Model

We investigate the relationship between uncertainty about monetary policy and its transmission mechanism, and economic fluctuations. We propose a new term structure model where the second moments of macroeconomic variables and yields can have a first‐order effect on their dynamics. The data favor a model with two unspanned volatility factors that capture uncertainty about monetary policy and the term premium. Uncertainty contributes negatively to economic activity. Two dimensions of uncertainty react in opposite directions to a shock to the real economy, and the response of inflation to uncertainty shocks varies across different historical episodes.

Inflation Announcements and Social Dynamics

We investigate the relationship between uncertainty about monetary policy and its transmission mechanism, and economic fluctuations. We propose a new term structure model where the second moments of macroeconomic variables and yields can have a first-order effect on their dynamics. The data favors a model with two unspanned volatility factors that capture uncertainty about monetary policy and the term premium. Uncertainty contributes negatively to economic activity. Two dimensions of uncertainty react in opposite directions to a shock to the real economy, and the response of inflation to uncertainty shocks vary across different historical episodes.

Risk Premia in Crude Oil Futures Prices

We propose a tractable and coherent framework that captures both conventional and unconventional monetary policies with the shadow fed funds rate. Empirically, we document the shadow rates resemblance to an overall financial conditions index, various private interest rates, the Feds balance sheet, and the Taylor rule. Theoretically, we demonstrate the impact of unconventional policies, such as QE and lending facilities, on the economy is identical to that of a negative shadow rate, making the latter a useful summary statistic for these policies. Our model generates the data-consistent result: a negative supply shock is always contractionary. It also salvages the New Keynesian model from the zero lower bound induced structural break.