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Why are long rates sensitive to monetary policy?

  • Ulf Soderstrom
  • Tore Ellingsen

We use a quantitative model of the U.S. economy to analyze the response of long-term interest rates to monetary policy, and compare the model results with empirical evidence. We find that the strong and time-varying yield curve response to monetary policy innovations found in the data can be explained by the model. A key ingredient in explaining the yield curve response is central bank private information about the state of the economy or about its own target for inflation

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 31.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:31
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  1. Soderlind, Paul, 1999. "Solution and estimation of RE macromodels with optimal policy," European Economic Review, Elsevier, vol. 43(4-6), pages 813-823, April.
  2. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  3. Roberto Rigobon & Brian P. Sack, 2002. "The Impact of Monetary Policy on Asset Prices," NBER Working Papers 8794, National Bureau of Economic Research, Inc.
  4. Glenn D. Rudebusch, 2000. "Assessing nominal income rules for monetary policy with model and data uncertainty," Working Paper Series 2000-03, Federal Reserve Bank of San Francisco.
  5. Ellingsen, Tore & Söderström, Ulf, 1998. "Monetary Policy and Market Interest Rates," SSE/EFI Working Paper Series in Economics and Finance 242, Stockholm School of Economics, revised 08 Mar 1999.
  6. Peersman, Gert, 2002. "Monetary policy and long term interest rates in Germany," Economics Letters, Elsevier, vol. 77(2), pages 271-277, October.
  7. Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 1999. "Is bank supervision central to central banking?," Working Papers 99-7, Federal Reserve Bank of Boston.
  8. Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 53-111, December.
  9. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York.
  10. Ric Battellino & John Broadbent & Philip Lowe, 1997. "The Implementation of Monetary Policy in Australia," RBA Research Discussion Papers rdp9703, Reserve Bank of Australia.
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