The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission

Zhengyang Chen

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: The federal funds rate became uninformative about the stance of monetary policy from December 2008 to November 2015. During the same period, unconventional monetary policy actions, like large-scale asset purchases, show the Federal Reserve’s intention to depress longer-term interest rates. This paper considers a long-term real interest rate as an alternative monetary policy indicator in a structural VAR framework. Based on an event study of FOMC announcements, I advance a novel measure of long-term interest rate volatility with important implication for monetary policy identification. I find that monetary policy shocks identified with this volatility measure drive significant swings in credit market sentiments and real output. In contrast, monetary policy shocks identified by otherwise standard unexpected policy rate changes lead to muted responses of financial frictions and production. Our results support the validity of the risk-taking channel and suggest an indispensable role of financial markets in monetary policy transmission.

Keywords: Monetary policy transmission; Structural VAR; Risk-taking channel; High-frequency identification (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission (2019)
Working Paper: The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:204579

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