Measuring the Effect of the Zero Lower Bound on Yields and Exchange Rates in the U.K. and Germany
Eric Swanson and
John Williams
No 2013-21, Working Paper Series from Federal Reserve Bank of San Francisco
Abstract:
The zero lower bound on nominal interest rates began to constrain many central banks? setting of short-term interest rates in late 2008 or early 2009. According to standard macroeconomic models, this should have greatly reduced the effectiveness of monetary policy and increased the efficacy of fiscal policy. However, these models also imply that asset prices and private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current level of the monetary policy rate. Thus, interest rates with a year or more to maturity are arguably more relevant for asset prices and the economy, and it is unclear to what extent those yields have been affected by the zero lower bound. In this paper, we apply the methods of Swanson and Williams (2013) to medium- and longer-term yields and exchange rates in the U.K. and Germany. In particular, we compare the sensitivity of these rates to macroeconomic news during periods when short-term interest rates were very low to that during normal times. We find that: 1) USD/GBP and USD/EUR exchange rates have been essentially unaffected by the zero lower bound, 2) yields on German bunds were essentially unconstrained by the zero bound until late 2012, and 3) yields on U.K. gilts were substantially constrained by the zero lower bound in 2009 and 2012, but were surprisingly responsive to news in 2010?11. We compare these findings to the U.S. and discuss their broader implications.
Keywords: Interest rates; Monetary policy (search for similar items in EconPapers)
Pages: 55 pages
Date: 2013-08-01
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)
Downloads: (external link)
http://www.frbsf.org/economic-research/files/wp2013-21.pdf (application/pdf)
Related works:
Chapter: Measuring the Effect of the Zero Lower Bound on Yields and Exchange Rates in the U.K. and Germany (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2013-21
Ordering information: This working paper can be ordered from
reference.library@sf.frb.org
DOI: 10.24148/wp2013-21
Access Statistics for this paper
More papers in Working Paper Series from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library (reference.library@sf.frb.org).