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Decoupling between the Federal Funds Rate and Long-term Interest Rates: Decreasing Effectiveness of Monetary Policy in the U.S

  • Hasan Cömert

Cömert investigates the relationship between overnight interest rates and the long-term rates in the US from 1983q1 to 2007q3. He presents evidence supporting the argument that there was a gradual decoupling between the Fed interest rate and long-term interest rates even before the recent crisis. In other words, the Fed was gradually losing its control over long-term interest rates. As opposed to many economists’ claims, the period after 2001 was a continuation of a process which has surfaced since the end of the 1980s. Both descriptive statistics and different econometric techniques robustly support the argument that the decoupling began way earlier than 2001. Furthermore, the purchase of the US assets by foreigners might have played some role in this process although the findings related to this are not very robust.

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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp295.

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Date of creation: 2012
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Handle: RePEc:uma:periwp:wp295
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  1. John Y. Campbell & Robert J. Shiller, 1989. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," NBER Working Papers 3153, National Bureau of Economic Research, Inc.
  2. Campbell, John, 1995. "Some Lessons from the Yield Curve," Scholarly Articles 3163264, Harvard University Department of Economics.
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  5. Michael Woodford, 2002. "Financial market efficiency and the effectiveness of monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 85-94.
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  9. Arturo Estrella, 2005. "Why Does the Yield Curve Predict Output and Inflation?," Economic Journal, Royal Economic Society, vol. 115(505), pages 722-744, 07.
  10. Friedman, Benjamin M, 2000. "Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking," International Finance, Wiley Blackwell, vol. 3(2), pages 261-72, July.
  11. Glenn D. Rudebusch & Eric T. Swanson & Tao Wu, 2006. "The bond yield "conundrum" from a macro-finance perspective," Working Paper Series 2006-16, Federal Reserve Bank of San Francisco.
  12. De Loubens, A. & Idier, J. & Jardet, C., 2007. "Determinants of long-term interest rates in the United States and the euro area: A multivariate approach," Working papers 170, Banque de France.
  13. Arturo Estrella & Frederic S. Mishkin, 1996. "The yield curve as a predictor of U.S. recessions," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 2(Jun).
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