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Monetary policy along the yield curve: why can central banks affect long-term real rates?

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Listed:
  • Paul Beaudry
  • Paolo Cavallino
  • Tim Willems

Abstract

Evidence suggests that monetary policy can affect long-term real interest rates, but it is not clear what drives this. We argue this occurs because very persistent policy-induced interest rate changes have only weak effects on activity. This can arise when consumption-savings decisions are not primarily driven by intertemporal substitution, but also by life-cycle forces associated with retirement. Within such an environment, we show that the impact of highly persistent monetary policy shocks is determined by two forces: an asset valuation effect, and the response of the average marginal propensity to consume out of financial wealth. Our quantitative analysis indicates that these forces roughly cancel out, allowing monetary policy to (unconsciously) drive trends in long-run real rates. Our findings also imply that very precise knowledge of r* might not be essential to the successful conduct of monetary policy.

Suggested Citation

  • Paul Beaudry & Paolo Cavallino & Tim Willems, 2025. "Monetary policy along the yield curve: why can central banks affect long-term real rates?," BIS Working Papers 1246, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1246
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    References listed on IDEAS

    as
    1. Obstfeld, Maurice, 2023. "Natural and Neutral Real Interest Rates: Past and Future," CEPR Discussion Papers 18658, C.E.P.R. Discussion Papers.
    2. Marius Brülhart & Jonathan Gruber & Matthias Krapf & Kurt Schmidheiny, 2022. "Behavioral Responses to Wealth Taxes: Evidence from Switzerland," American Economic Journal: Economic Policy, American Economic Association, vol. 14(4), pages 111-150, November.
    3. Jonathon Hazell & Juan Herreño & Emi Nakamura & Jón Steinsson, 2022. "The Slope of the Phillips Curve: Evidence from U.S. States," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 137(3), pages 1299-1344.
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    Cited by:

    1. Garabedian, Garo, 2025. "Star-struck; Monetary Policy and the Neutral Rate," Research Technical Papers 4/RT/25, Central Bank of Ireland.

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    More about this item

    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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