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The response of long-term interest rates to news about monetary policy actions: Empirical evidence for the US and Germany

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  • Nautz, Dieter
  • Wolters, Jürgen

Abstract

We reexamine the expectations theory of the term structure focusing on the question how monetary policy actions indicated by changes in the very short rate affect long-term interest rates. Our main point is that the expectations hypothesis implies that very long rates should only react to unanticipated changes of the very short rate. In contrast to cointegration tests of expectations theory this implication only requires rational expectations but not stationary risk premia. Therefore, its empirical test sheds new light on the importance of expectations theory for the determinants of the term structure of interest rates.

Suggested Citation

  • Nautz, Dieter & Wolters, Jürgen, 1998. "The response of long-term interest rates to news about monetary policy actions: Empirical evidence for the US and Germany," SFB 373 Discussion Papers 1998,78, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    • Handle: RePEc:zbw:sfb373:199878
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    1. Martin T. Bohl & Pierre L. Siklos, 2004. "The Bundesbank's Inflation Policy and Asymmetric Behavior of the German Term Structure," Review of International Economics, Wiley Blackwell, vol. 12(3), pages 495-508, August.
    2. Ruth, Karsten, 2004. "Interest rate reaction functions for the euro area Evidence from panel data analysis," Discussion Paper Series 1: Economic Studies 2004,33, Deutsche Bundesbank.
    3. Kosfeld Reinhold, 2002. "Asset Price Channel and Financial Markets / Vermögenstheoretischer Transmissionsmechanismus und Finanzmärkte," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 222(4), pages 440-462, August.
    4. Holtemöller, Oliver, 2002. "Further VAR evidence for the effectiveness of a credit channel in Germany," SFB 373 Discussion Papers 2002,66, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    5. Jaenicke, Johannes, 2001. "Price and hedging policy: The case of an intertemporarily risk averse bank," Economics Letters, Elsevier, vol. 71(3), pages 391-396, June.
    6. Kremer, Manfred, 1999. "Die Kapitalmarktzinsen in Deutschland und den USA: Wie eng ist der Zinsverbund? Eine Anwendung der multivariaten Kointegrationsanalyse," Discussion Paper Series 1: Economic Studies 1999,02, Deutsche Bundesbank.
    7. Boris Hofmann, 2006. "EMU and the transmission of monetary policy: evidence from business lending rates," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 33(4), pages 209-229, September.

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    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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