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The Aggregate Demand Effects of Short- and Long-Term Interest Rates

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  • Michael T. Kiley

    (Federal Reserve Board)

Abstract

I develop empirical models of the U.S. economy that distinguish between the aggregate demand effects of short- and long-term interest rates—one with clear “microfoundations” and one more loosely motivated. These models are estimated using government and private long-term bond yields. Estimation results suggest that both short- and long-term interest rates influence aggregate spending. The results indicate that the short-term interest rate has a larger influence on economic activity, through its impact on the entire term structure, than term and risk premiums (for equal-sized movements in long-term interest rates). Potential policy implications are discussed.

Suggested Citation

  • Michael T. Kiley, 2014. "The Aggregate Demand Effects of Short- and Long-Term Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 10(4), pages 69-104, December.
    • Handle: RePEc:ijc:ijcjou:y:2014:q:4:a:3
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    More about this item

    JEL classification:

    • 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
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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