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

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  • Hasan Cömert

Abstract

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.

Suggested Citation

  • Hasan Cömert, 2012. "Decoupling between the Federal Funds Rate and Long-term Interest Rates: Decreasing Effectiveness of Monetary Policy in the U.S," Working Papers wp295, Political Economy Research Institute, University of Massachusetts at Amherst.
  • Handle: RePEc:uma:periwp:wp295
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    File URL: https://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP295.pdf
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    References listed on IDEAS

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    Cited by:

    1. Guillermo Gigliani, 2014. "The Reform of the Federal Reserve in 2008: Is the Money Supply Endogenous or Exogenous?," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(71), pages 73-94, December.
    2. Holmes, Mark J. & Otero, Jesús & Panagiotidis, Theodore, 2015. "The expectations hypothesis and decoupling of short- and long-term US interest rates: A pairwise approach," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 301-313.

    More about this item

    Keywords

    Central Banking; Federal Funds Rate; US Monetary Policy; Short-Term and Long Term Interest Rates; Decoupling;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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