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The aggregate demand effects of short- and long-term interest rates

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  • Michael T. Kiley

Abstract

I develop empirical models of the U.S. economy that distinguish between the aggregate demand effects of short- and long-term interest rates-one with clear "microfoundations" and one more loosely motivated. These models are estimated using government and private long-term bond yields. Estimation results suggest short- and long-term interest rates both influence aggregate spending. The results indicate that the short-term interest rate has a larger influence on economic activity, through its impact on the entire term structure, than term and risk premiums (for equal-sized movements in long-term interest rates). Potential policy implications are discussed.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-54.

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Date of creation: 2012
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Handle: RePEc:fip:fedgfe:2012-54

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References

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  1. Glenn D. Rudebusch & Brian P. Sack & Eric T. Swanson, 2007. "Macroeconomic implications of changes in the term premium," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 241-270.
  2. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 3-46, 02.
  3. Eric T. Swanson, 2011. "Let's Twist Again: A High-Frequency Event-study Analysis of Operation Twist and Its Implications for QE2," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 151-207.
  4. Jean Boivin & Michael T. Kiley & Frederic S. Mishkin, 2010. "How Has the Monetary Transmission Mechanism Evolved Over Time?," NBER Working Papers 15879, National Bureau of Economic Research, Inc.
  5. Han Chen & Vasco Cúrdia & Andrea Ferrero, 2012. "The macroeconomic effects of large-scale asset purchase programs," Working Paper Series 2012-22, Federal Reserve Bank of San Francisco.
  6. James D. Hamilton & Dong Heon Kim, 2000. "A Re-examination of the Predictability of Economic Activity Using the Yield Spread," NBER Working Papers 7954, National Bureau of Economic Research, Inc.
  7. Hess Chung & Jean-Philippe Laforte & David Reifschneider & John C. Williams, 2011. "Have we underestimated the likelihood and severity of zero lower bound events?," Working Paper Series 2011-01, Federal Reserve Bank of San Francisco.
  8. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "Large-scale asset purchases by the Federal Reserve: did they work?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 41-59.
  9. Gürkaynak, Refet S. & Wright, Jonathan, 2010. "Macroeconomics and the Term Structure," CEPR Discussion Papers 8018, C.E.P.R. Discussion Papers.
  10. Adjemian, Stéphane & Bastani, Houtan & Karamé, Fréderic & Juillard, Michel & Maih, Junior & Mihoubi, Ferhat & Perendia, George & Pfeifer, Johannes & Ratto, Marco & Villemot, Sébastien, 2011. "Dynare: Reference Manual Version 4," Dynare Working Papers 1, CEPREMAP, revised Apr 2014.
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Blog mentions

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  1. The Federal Reserve: Looking Back, Looking Forward
    by Guest Author in The Big Picture on 2014-01-04 10:00:00
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Cited by:
  1. Michael T. Kiley, 2013. "Exchange rates, monetary policy statements, and uncovered interest parity: before and after the zero lower bound," Finance and Economics Discussion Series 2013-17, Board of Governors of the Federal Reserve System (U.S.).
  2. Michael T. Kiley, 2013. "The response of equity prices to movements in long-term interest rates associated with monetary policy statements: before and after the zero lower bound," Finance and Economics Discussion Series 2013-15, Board of Governors of the Federal Reserve System (U.S.).
  3. John C. Williams, 2013. "A defense of moderation in monetary policy," Working Paper Series 2013-15, Federal Reserve Bank of San Francisco.
  4. Michael T. Kiley, 2013. "Monetary policy statements, Treasury yields, and private yields: before and after the zero lower bound," Finance and Economics Discussion Series 2013-16, Board of Governors of the Federal Reserve System (U.S.).
  5. Putnam, Bluford H., 2013. "Essential concepts necessary to consider when evaluating the efficacy of quantitative easing," Review of Financial Economics, Elsevier, vol. 22(1), pages 1-7.

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