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Interest rate spreads and forward guidance

Author

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  • Bredemeier, Christian
  • Kaufmann, Christoph
  • Schabert, Andreas

Abstract

We provide evidence that liquidity premia on assets that are more relevant for private agents’ intertemporal choices than near-money assets increase in response to expansionary forward guidance announcements. We introduce a structural specification of liquidity premia based on assets’ differential pledgeability to a basic New Keynesian model to replicate this finding. This model predicts that output and inflation effects of forward guidance do not increase with the length of the guidance period and are substantially smaller than if liquidity premia were neglected. This indicates that there are no puzzling forward guidance effects when endogenous liquidity premia are taken into account. JEL Classification: E32, E42, E52

Suggested Citation

  • Bredemeier, Christian & Kaufmann, Christoph & Schabert, Andreas, 2018. "Interest rate spreads and forward guidance," Working Paper Series 2186, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20182186
    Note: 2857527
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    Cited by:

    1. Diba, Behzad & Loisel, Olivier, 2021. "Pegging the interest rate on bank reserves: A resolution of New Keynesian puzzles and paradoxes," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 230-244.
    2. Pascal Michaillat & Emmanuel Saez, 2021. "Resolving New Keynesian Anomalies with Wealth in the Utility Function," The Review of Economics and Statistics, MIT Press, vol. 103(2), pages 197-215, May.
    3. Christian Bredemeier & Falko Juessen & Andreas Schabert, 2021. "Why Are Fiscal Multipliers Moderate Even Under Monetary Accommodation?," ECONtribute Discussion Papers Series 074, University of Bonn and University of Cologne, Germany.

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    More about this item

    Keywords

    forward guidance; liquidity premium; unconventional monetary policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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