The Monetary Policy Transmission Mechanism in a Term-Structure Model with Unspanned Macro Risks

In this paper I study how exogenous monetary policy impulses jointly transmit to the US macroeconomy and term structure. I estimate a Macro-Affine Term Structure Model similar to Joslin, Priebsch and Singleton (2010), and use this framework to identify monetary policy shocks and term premia. My main finding is that monetary policy shocks trigger relevant movements in long-term bond premia, which in turn feed back into the macroeconomy. This gives rise to a "term-premium channel of monetary transmission", which I show is particularly important in the pre-Volcker period. In the post-Volcker period, this channel turns out to be empirically irrelevant. I then estimate how shocks to future monetary policy expectations transmit to the economy. I find that, in the post-Volcker period, shocks to policy expectations produce more pronounced and more intuitive responses for the macroeconomic variables than standard shocks to the contemporaneous value of the monetary policy instrument. This result indicates that communication between the Fed and private agents is a powerful monetary policy instrument