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The term structure of CD rates and monetary policy transmission

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  • Nishiyama, Yasuo
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    Abstract

    The paper investigates the term structure of CD rates and its relationship with the federal funds rate or monetary policy. The term structure derived in this paper is governed primarily by the federal funds rate and secondarily by banks' income smoothing behavior. It is consistent with the estimation results and differs significantly from the standard term structure of interest rates. The downturn phase of business cycles appears to be accompanied by more aggressive income smoothing by banks (compared with the upturn phase) due to their pessimistic expectations of future profits. The compositional shift in banks' liabilities during the downturn phase away from CDs toward transaction deposits may pose a greater withdrawal risk for banks.

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    File URL: http://www.sciencedirect.com/science/article/B6VCY-50KRYP9-4/2/eb6152632befe082c9fd0f7fabdd3bac
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 1 (January)
    Pages: 82-94

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:1:p:82-94

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Term structure of interest rates Certificates of deposit Income smoothing Monetary policy transmission;

    References

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    Cited by:
    1. Kelly, Logan & Barnett, William A. & Keating, John, 2010. "Rethinking the liquidity puzzle: application of a new measure of the economic money stock," MPRA Paper 22087, University Library of Munich, Germany.

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