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

  • Gareis, Johannes
  • Mayer, Eric

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.

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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 120 (2013)
Issue (Month): 1 ()
Pages: 27-31

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Handle: RePEc:eee:ecolet:v:120:y:2013:i:1:p:27-31
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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  1. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  2. Matteo Iacoviello & Stefano Neri, 2008. "Housing market spillovers: Evidence from an estimated DSGE model," Temi di discussione (Economic working papers) 659, Bank of Italy, Economic Research and International Relations Area.
  3. Richard Dennis, 2009. "Consumption Habits in a New Keynesian Business Cycle Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(5), pages 1015-1030, 08.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  5. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2009. "New Keynesian Models: Not Yet Useful for Policy Analysis," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 242-66, January.
  6. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2007. "Euler equations and money market interest rates: A challenge for monetary policy models," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1863-1881, October.
  7. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  8. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 6112, C.E.P.R. Discussion Papers.
  9. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  10. Collard, Fabrice & Dellas, Harris, 2012. "Euler equations and monetary policy," Economics Letters, Elsevier, vol. 114(1), pages 1-5.
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