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The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks

Daniel Thornton

No 2009-037, Working Papers from Federal Reserve Bank of St. Louis

Abstract: It is common practice to estimate the response of asset prices to monetary policy actions using market-based measures of monetary policy shocks, such as the federal funds futures rate. I show that because interest rates and market-based measures of monetary policy shocks respond simultaneously to all news and not simply news about monetary policy actions, market-based measures of monetary policy shocks yield biased estimates of the response of interest rates to monetary policy actions. I propose a methodology that corrects for this \"joint-response bias.\" The results indicate that the response of Treasury yields to monetary policy actions is considerably weaker than previously estimated. In particular, there is no statistically significant response of longer-term Treasury yields before February 2000 and no statistically significant response of any Treasury rate after.

Keywords: Prices; Monetary policy; Federal funds rate (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (7)

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Journal Article: The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks (2014) Downloads
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