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Monetary Policy Along the Yield Curve: Why Can Central Banks Affect Long-Term Real Rates?

Author

Listed:
  • Paul Beaudry
  • Paolo Cavallino
  • Tim Willems

Abstract

Real interest rates are widely considered to be driven by real forces over time, with monetary policy having only short-lived effects. We present theory and evidence suggesting instead that monetary policy may (unintentionally) contribute to low-frequency dynamics in real rates. We first show how temporary demand shocks generate persistent movements in forward real rates and r* -estimates. We then demonstrate how such “real rate hysteresis” emerges if the central bank overestimates the sensitivity of aggregate demand to permanent real-rate changes when inferring r*. Such overestimation can arise if the central bank insufficiently incorporates life-cycle forces in its model of r*.

Suggested Citation

  • Paul Beaudry & Paolo Cavallino & Tim Willems, 2024. "Monetary Policy Along the Yield Curve: Why Can Central Banks Affect Long-Term Real Rates?," NBER Working Papers 32511, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32511
    Note: EFG ME
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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.

    More about this item

    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
    • 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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