Volatility, Money Market Rates, and the Transmission of Monetary Policy
AbstractWe explore the effect of volatility in the federal funds market on the expectations hypothesis in money markets. We find that lower volatility in the bank funding markets market, all else equal, leads to a lower term premium and thus longer-term rates for a given setting of the overnight rate. The results appear to hold for the US as well as the Euro Area and the UK. The results have implications for the design of operational frameworks for the implementation of monetary policy and for the interpretation of the changes in the Libor-OIS spread during the financial crisis
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Bibliographic InfoPaper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1129.
Length: 38 pages
Date of creation: Oct 2011
Date of revision:
Monetary transmission mechanism; expectations hypothesis; term premium;
Other versions of this item:
- Seth B. Carpenter & Selva Demiralp, 2011. "Volatility, money market rates, and the transmission of monetary policy," Finance and Economics Discussion Series 2011-22, Board of Governors of the Federal Reserve System (U.S.).
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-12-13 (All new papers)
- NEP-CBA-2011-12-13 (Central Banking)
- NEP-EEC-2011-12-13 (European Economics)
- NEP-MAC-2011-12-13 (Macroeconomics)
- NEP-MON-2011-12-13 (Monetary Economics)
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