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Monetary policy and long-term real rates

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  • Samuel Hanson
  • Jeremy C. Stein

Abstract

Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis-point increase in the 2-year nominal yield on an FOMC announcement day is associated with a 42 basis-point increase in the 10-year forward real rate. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Rather, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that may generate such variation in term premia is based on demand effects coming from "yield-oriented" investors. We find some evidence supportive of this channel.

Suggested Citation

  • Samuel Hanson & Jeremy C. Stein, 2012. "Monetary policy and long-term real rates," Finance and Economics Discussion Series 2012-46, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2012-46
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    References listed on IDEAS

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    1. Faust Jon & Swanson Eric T & Wright Jonathan H, 2004. "Do Federal Reserve Policy Surprises Reveal Superior Information about the Economy?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-31, October.
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    5. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 215-287.
    6. Robin Greenwood & Samuel G. Hanson, 2011. "Issuer Quality and the Credit Cycle," NBER Working Papers 17197, National Bureau of Economic Research, Inc.
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    10. Carolin E. Pflueger & Luis M. Viceira, 2011. "Inflation-Indexed Bonds and the Expectations Hypothesis," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 139-158, December.
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    Cited by:

    1. Berndt, Antje & Yeltekin, Şevin, 2015. "Monetary policy, bond returns and debt dynamics," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 119-136.
    2. Arianna Miglietta & Cristina Picillo & Mario Pietrunti, 2015. "The impact of CCPs' margin policies on repo markets," BIS Working Papers 515, Bank for International Settlements.
    3. Adrian, Tobias & Liang, J. Nellie, 2014. "Monetary policy, financial conditions, and financial stability," Staff Reports 690, Federal Reserve Bank of New York, revised 01 Dec 2016.
    4. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
    5. Beck, Thorsten & Colciago, Andrea & Pfajfar, Damjan, 2014. "The role of financial intermediaries in monetary policy transmission," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 1-11.
    6. Hanson, Samuel G., 2014. "Mortgage convexity," Journal of Financial Economics, Elsevier, vol. 113(2), pages 270-299.

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