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Monetary policy actions and long-term interest rates

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Author Info
V. Vance Roley
Gordon H. Sellon, Jr.
Abstract

It is generally believed that monetary policy actions are transmitted to the economy through their effect on market interest rates. According to this standard view, a restrictive monetary policy by the Federal Reserve pushes up both short-term and long-term interest rates, leading to less spending by interest-sensitive sectors of the economy such as housing, consumer durable goods, and business fixed investment. Conversely, an easier policy results in lower interest rates that stimulate economic activity. Unfortunately, empirical studies and the observed behavior of interest rates appear to challenge the standard view of the monetary transmission mechanism and raise questions about the effectiveness of monetary policy.> Roley and Sellon attempt to reconcile theory and reality by reexamining the connection between monetary policy and long-term interest rates. Using a framework that emphasizes the importance of market expectations of future monetary policy actions, the authors argue that the relationship between policy actions and long-term rates is likely to vary over the business cycle as financial market participants alter their views on the persistence of policy actions. Accordingly, the standard view of the monetary transmission mechanism appears to provide an overly simplistic view of the policy process. In addition, by capturing the tendency of market rates to anticipate policy actions, the authors find a larger response of long-term rates to monetary policy actions than reported in previous research.

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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (1995)
Issue (Month): Q IV ()
Pages: 73-89
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Handle: RePEc:fip:fedker:y:1995:i:qiv:p:73-89:n:v.80no.4

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Keywords: Interest rates ; Monetary policy;

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  1. Michael Lamla & Sarah M. Rupprecht, 2006. "The Impact of ECB Communication on Financial Market Expectations," KOF Working papers 06-135, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
  2. Daniel Hartmann, 2001. "Taylor-Regel und amerikanische Geldpolitik," Violette Reihe Arbeitspapiere 17-2001, Promotionsschwerpunkt Globalisierung und Beschaeftigung. [Downloadable!]
  3. Cinzia Alcidi & Alessandro Flamini & Andrea Fracasso, 2005. ""Taylored" rules. Does one fit (or hide) all?," HEI Working Papers 04-2005, Economics Section, The Graduate Institute of International Studies, revised Apr 2006. [Downloadable!]
  4. Athanasios Orphanides & John C. Williams, 2006. "Inflation Targeting Under Imperfect Knowledge," Working Papers Central Bank of Chile 398, Central Bank of Chile. [Downloadable!]
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  5. Athanasios Orphanides & John C. Williams, 2005. "Inflation scares and forecast-based monetary policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 498-527, April. [Downloadable!] (restricted)
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  6. Yash P. Mehra, 1996. "Monetary policy and long-term interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 27-49. [Downloadable!]
  7. Andrew Swiston, 2007. "Where Have the Monetary Surprises Gone? The Effects of FOMC Statements," IMF Working Papers 07/185, International Monetary Fund. [Downloadable!]
  8. Giorgio Valente, 2005. "US Monetary Policy Announcements and the Term Structure of Interest Rate Differentials: Evidence from Hong Kong and Singapore," Working Papers 092005, Hong Kong Institute for Monetary Research. [Downloadable!]
  9. Meredith J. Beechey & Jonathan H. Wright, 2008. "The high-frequency impact of news on long-term yields and forward rates: Is it real?," Finance and Economics Discussion Series 2008-39, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. Aron, Janine & Muellbauer, John, 2006. "Review of Monetary Policy in South Africa: 1994-2004," CEPR Discussion Papers 5831, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Daniel L. Thornton, 1996. "Does the Fed's new policy of immediate disclosure affect the market?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 77-88. [Downloadable!]
  12. V. Vance Roley & Gordon H. Sellon, Jr., 1998. "Market reaction to monetary policy nonannouncements," Research Working Paper 98-06, Federal Reserve Bank of Kansas City. [Downloadable!]
  13. Antulio N. Bomfim & Vincent R. Reinhart, 2000. "Making news: financial market effects of Federal Reserve disclosure practices," Finance and Economics Discussion Series 2000-14, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  14. Luis Eduardo Arango & Andrés González & John Jairo León & Luis Fernando Melo, . "Efectos de los cambios en la tasa de intervención del Banco de la República sobre la estructura a plazo," Borradores de Economia 424, Banco de la Republica de Colombia. [Downloadable!]
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  15. Kursat Kunter & Norbert Janssen, 2002. "Credibility Of Monetary Regimes : Is Inflation Targeting Different?," Discussion Papers 0201, Research and Monetary Policy Department, Central Bank of the Republic of Turkey. [Downloadable!]
  16. Bredin, Don & Gavin, Caroline & O'Reilly, Gerard, 2003. "International Policy Rate Changes and Dublin Interbank Offer Rates," Research Technical Papers 8/RT/03, Central Bank & Financial Services Authority of Ireland (CBFSAI). [Downloadable!]
  17. Cinzia Alcidi & Alessandro Flamini & Andrea Fracasso, 2005. "``Taylored'' Rules. Does One Fit All?," Keele Economics Research Papers KERP 2007/06, Centre for Economic Research, Keele University, revised Mar 2007. [Downloadable!]
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