Aeimit Lakdawala is an assistant professor of economics at Michigan State University. His research is in the field of applied macroeconomics with a focus on monetary policy. He has previously worked at Bank of England, Federal Reserve Bank of St. Louis, and Reserve Bank of India at different capacities as an economic research associate. Lakdawala recieved his bachelor’s degree in computer science from The University of Texas at Austin, and completed his graduate studies in economics at University of California.

Abstract: We explore the effects of Federal Reserve credibility on the term structure of interest rates. First, in a simple model of optimal monetary policy we show theoretically how different assumptions about the level of credibility of the central bank can affect the term structure of interest rates. Next, using a regime-switching approach, we estimate a DSGE model with optimal monetary policy and a no-arbitrage term-structure framework. Federal Reserve behavior is modeled using the loose commitment setting, which nests the commonly used discretion and full commitment assumptions. We investigate the effects of re-optimization shocks on the term structure and explore the role of credibility through counterfactual simulations.