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The Fed and Interest Rates - A High-Frequency Identification

We measure monetary policy shocks as changes in the Fed funds target rate that surprise bond markets in daily data. These shock series avoid the omitted variable, time-varying parameter, and orthogonalization problem of monthly VARs, and do not impose the expectations hypothesis. We find surprisingly large and persistent responses of bond yields to these shocks. 10 year rates rise as much as 8/10 of a percent to a one percent target shock. The usual view that monetary policy only temporarily raises long term rates and influences inflation would lead one to predict a negative long rate response.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282802320189069
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 92 (2002)
Issue (Month): 2 (May)
Pages: 90-95

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Handle: RePEc:aea:aecrev:v:92:y:2002:i:2:p:90-95
Note: DOI: 10.1257/000282802320189069
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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  2. Cochrane, John H, 1989. "The Return of the Liquidity Effect: A Study of the Short-run Relation between Money Growth and Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(1), pages 75-83, January.
  3. Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
  4. Piazzesi, Monika, 2001. "An Econometric Model of the Yield Curve With Macroeconomic Jump Effects," University of California at Los Angeles, Anderson Graduate School of Management qt5946p7hn, Anderson Graduate School of Management, UCLA.
  5. Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 53-111, December.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
  7. Monika Piazzesi, 2001. "An Econometric Model of the Yield Curve with Macroeconomic Jump Effects," NBER Working Papers 8246, National Bureau of Economic Research, Inc.
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