The term structure of policy rules

A formula is derived that links the coefficients of the monetary policy rule for the short-term interest rate to the coefficients of the implied affine equations for long-term interest rates. The formula predicts that an increase in the coefficients in the monetary policy rule will lead to an increase in the coefficients in the affine equations. Empirical evidence for such a prediction is provided. The curve of the response coefficients by maturity is also predicted by the formula. The formula's predictive accuracy and its closed form make it a useful tool for studying the policy implications of embedding no-arbitrage affine theories into macro models. (C) 2009 Elsevier B.V. All rights reserved.