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Euler equations and money market interest rates: The role of monetary policy and risk premium shocks

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  • Gareis, Johannes
  • Mayer, Eric

Abstract

We challenge the view that the negative correlation between the Federal Funds and the Euler equation interest rate is linked to monetary policy. Using Monte Carlo experiments, we show that the negative correlation can be explained by risk premium disturbances.

Suggested Citation

  • Gareis, Johannes & Mayer, Eric, 2013. "Euler equations and money market interest rates: The role of monetary policy and risk premium shocks," Economics Letters, Elsevier, vol. 120(1), pages 27-31.
    • Handle: RePEc:eee:ecolet:v:120:y:2013:i:1:p:27-31
    DOI: 10.1016/j.econlet.2013.03.025
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    References listed on IDEAS

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    1. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
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    More about this item

    Keywords

    Euler interest rate; Monetary policy; Risk premium shocks;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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