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Changes in monetary policy and the variation in interest rate changes across credit markets

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  • Devin Reilly
  • Pierre-Daniel G. Sarte

Abstract

This article uses principal component methods to assess the importance of changes in the federal funds rate in driving interest rate changes across a broad array of credit markets. We find that most of the variability in interest rate changes across these markets is explained by a small number of common components. Furthermore, for many of the interest rate series in our sample, changes that reflect common movements are highly correlated with changes in the federal funds rate. However, in some credit markets associated with longer maturities, such as the mortgage market, common movements are less correlated with changes in the federal funds rate. Therefore, interest rate changes in those markets are i) more likely to reflect aggregate disturbances somewhat unrelated to monetary policy, or ii) related to contemporaneous monetary policy more indirectly through changes in expected future short rates. We also find evidence that movements in the auto loan market are almost entirely driven by idiosyncratic considerations rather than changes in the federal funds rate.

Suggested Citation

  • Devin Reilly & Pierre-Daniel G. Sarte, 2010. "Changes in monetary policy and the variation in interest rate changes across credit markets," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 96(2Q), pages 201-229.
    • Handle: RePEc:fip:fedreq:y:2010:i:2q:p:201-229:n:v.96no.2
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    References listed on IDEAS

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    1. John B. Taylor, 2007. "Housing and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 463-476.
    2. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    3. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
    4. Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. "Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, vol. 49(5), pages 1861-1882, December.
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    Cited by:

    1. Valadkhani, Abbas & Bollen, Bernard, 2013. "An alternative approach to the modelling of interest rate pass through and asymmetric adjustment," Economics Letters, Elsevier, vol. 120(3), pages 491-494.

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