Monetary policy actions and long-term interest rates
It is generally believed that monetary policy actions are transmitted to the economy through their effect on market interest rates. According to this standard view, a restrictive monetary policy by the Federal Reserve pushes up both short-term and long-term interest rates, leading to less spending by interest-sensitive sectors of the economy such as housing, consumer durable goods, and business fixed investment. Conversely, an easier policy results in lower interest rates that stimulate economic activity. Unfortunately, empirical studies and the observed behavior of interest rates appear to challenge the standard view of the monetary transmission mechanism and raise questions about the effectiveness of monetary policy.> Roley and Sellon attempt to reconcile theory and reality by reexamining the connection between monetary policy and long-term interest rates. Using a framework that emphasizes the importance of market expectations of future monetary policy actions, the authors argue that the relationship between policy actions and long-term rates is likely to vary over the business cycle as financial market participants alter their views on the persistence of policy actions. Accordingly, the standard view of the monetary transmission mechanism appears to provide an overly simplistic view of the policy process. In addition, by capturing the tendency of market rates to anticipate policy actions, the authors find a larger response of long-term rates to monetary policy actions than reported in previous research.
Volume (Year): (1995)
Issue (Month): Q IV ()
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Marvin Goodfriend, 1993.
"Interest rate policy and the inflation scare problem: 1979-1992,"
Federal Reserve Bank of Richmond, issue Win, pages 1-24.
- Marvin Goodfriend, 1993. "Interest rate policy and the inflation scare problem: 1979-1992," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
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- Rudebusch, Glenn D., 1995.
"Federal Reserve interest rate targeting, rational expectations, and the term structure,"
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Elsevier, vol. 35(2), pages 245-274, April.
- Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
- Longstaff, Francis A, 1990. " Time Varying Term Premia and Traditional Hypotheses about the Term Structure," Journal of Finance, American Finance Association, vol. 45(4), pages 1307-1314, September.
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