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

Author

Listed:
  • Paul Beaudry

    (University of British Columbia and NBER)

  • Paolo Cavallino

    (Bank of International Settlements)

  • Tim Willems

    (Bank of England)

Abstract

This paper presents theory and evidence to advance the notion that very persistent policy‑induced interest rate changes may have only weak effects on activity. This arises when consumption‑savings decisions are not primarily driven by intertemporal substitution, but also by life‑cycle forces. The small impact of persistent rate changes results when intertemporal substitution and asset valuation effects are offset by interest income effects, which affect asset demand. In our framework, knowing the exact location of r* becomes less critical to central banks, as interest rates can be kept away from this level for prolonged periods of time, allowing monetary policy to unconsciously drive trends in real rates. This perspective offers an explanation to a set of puzzles, including why long‑term real rates often move quite closely with short‑term policy rates.

Suggested Citation

  • Paul Beaudry & Paolo Cavallino & Tim Willems, 2025. "Monetary policy along the yield curve: why can central banks affect long-term real rates?," Bank of England working papers 1117, Bank of England.
    • Handle: RePEc:boe:boeewp:1117
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    References listed on IDEAS

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    Cited by:

    1. Bardóczy, Bence & Savoia, Ettore & Vel´asquez-Giraldo, Mateo, 2026. "HANK Comes of Age: Monetary Policy with Heterogeneous Overlapping Generations," Working Paper Series 461, Sveriges Riksbank (Central Bank of Sweden).
    2. 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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