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Euler equations and money market interest rates: The role of monetary and risk premium shocks

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  • Gareis, Johannes
  • Mayer, Eric

Abstract

This paper challenges the view that the observed negative correlation between the Federal Funds rate and the interest rate implied by consumption Euler equations is systematically linked to monetary policy. By using a Monte Carlo experiment, we show that stochastic risk premium disturbances have the capability to drive a wedge between the interest rate targeted by the central bank and the implied Euler equation interest rate such that the correlation between actual and implied rates is negative.

Suggested Citation

  • Gareis, Johannes & Mayer, Eric, 2012. "Euler equations and money market interest rates: The role of monetary and risk premium shocks," W.E.P. - Würzburg Economic Papers 89, University of Würzburg, Department of Economics.
  • Handle: RePEc:zbw:wuewep:89
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    References listed on IDEAS

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    More about this item

    Keywords

    Euler Interest Rate; Monetary Policy; Risk Premium Shocks;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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