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Monetary Policy Uncertainty and Market Interest Rates *1

June 2005
Ryo Kato*2
Yoshifumi Hisata*3

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  • *1 We are grateful to Andy Hiroyasu for his assistance. We appreciate comments by Akinari Horii, Takashi Ui, Etsuro Shioji, Nobuyuki Oda, Shin-Ichi Nishiyama, ToshiakiWatanabe, Hibiki Ichiue, Toshitaka Sekine, Eiji Hirano, and other participants in workshops at the Bank of Japan and Yokohama National University. All remaining errors are our own. The views expressed in this paper are those of the authors and do not reflect those of the Bank of Japan.
  • *2 Corresponding author: US and European Research Section, International Department, E-mail:
    Personal web site:
  • *3 International Department, E-mail:


This paper examines the relationship between monetary policy uncertainty and the term structure of interest rates. Extending the Ellingsen and Söderström (2001) model, we demonstrate that long-term interest rates are positively related to monetary policy uncertainty, with the magnitude increasing with maturity. Further, we present empirical evidence to show that the theoretical prediction is generally consistent with US data.

Monetary policy, term structure of interest rates, GARCH.

JEL Classification:
E43, E5