JEL Classification: C13, E43, E52, G12 Keywords: affine term structure model, monetary policy, interest rate risk * We especially thank Bob Hodrick for providing detailed comments and valuable suggestions. Abstract We estimate Taylor ( 1993) rules and identify monetary policy shocks using no-arbitrage pricing techniques. Long-term interest rates are risk-adjusted expected values of future short rates and thus provide strong over-identifying restrictions about the policy rule used by the Federal

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... Reserve. The no-arbitrage framework also accommodates backward-looking and forward-looking Taylor rules. We find that inflation and GDP growth account for over half of the time-variation of yield levels and we attribute almost all of the movements in the term spread to inflation. Taylor rules estimated with no-arbitrage restrictions differ substantially from Taylor rules estimated by OLS and monetary policy shocks identified with no-arbitrage techniques are less volatile than their OLS counterparts.