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Cracking the Conundrum

Author

Listed:
  • David K. Backus

    (New York University)

  • Jonathan H. Wright

    (Board of Governors of the Federal Reserve System)

Abstract

From 2004 to 2006 the Federal Open Market Committee raised the target federal funds rate by 4.25 percentage points, yet long-maturity yields and forward rates fell. We consider several possible explanations for this conundrum of rising short-term and falling long-term interest rates. The most likely, in our view, is a fall in the term premium, probably associated with some combination of diminished macroeconomic and financial market volatility, more predictable monetary policy, and the state of the business cycle.

Suggested Citation

  • David K. Backus & Jonathan H. Wright, 2007. "Cracking the Conundrum," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 293-329.
    • Handle: RePEc:bin:bpeajo:v:38:y:2007:i:2007-1:p:293-329
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    macroeconomics; Federal funds rate; interest rates; financial market volatility;

    JEL classification:

    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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