Title: Medium- and long-term interest rate uncertainty
Authors: Danilo Cascaldi-Garcia - Federal Reserve Board (United States)
Cisil Sarisoy - Federal Reserve Board (United States) [presenting]
Abstract: The resolution of medium- and long-term uncertainty about interest rates cause sizable expansionary economic effects that are not explained by other uncertainty sources. We construct market-based uncertainty measures for the 2- and 10-year interest rates from interest rate options. While uncertainty about the interest rate resolves around FOMCs, the dynamics of the medium- and long-term are markedly different. We show that two underlying shocks explain the joint movements between the medium- and long-term interest rate uncertainty: one which uncertainties resolve in tandem, and another where they move in opposite directions. While the first explains about 20 percent of long-term industrial production increases, the second is associated with VIX and stock market short-term movements. Other traditional uncertainty shocks, like VIX shocks, are not confounded with interest rate uncertainty shocks, highlighting the novelty of their business cycle driving forces.