Monetary policy along the yield curve: why can central banks affect long-term real rates?

Paul Beaudry, Paolo Cavallino and Tim Willems

No 1246, BIS Working Papers from Bank for International Settlements

Abstract: Real interest rates are widely considered to be driven by real forces over time, with monetary policy having only short-lived effects. We present theory and evidence suggesting instead that monetary policy may (unintentionally) contribute to low-frequency dynamics in real rates. We first show how temporary demand shocks generate persistent movements in forward real rates and r*-estimates. We then demonstrate how such “real rate hysteresis” emerges if the central bank overestimates the sensitivity of aggregate demand to permanent real-rate changes when inferring r*. Such overestimation can arise if the central bank insufficiently incorporates life-cycle forces in its model of r*.

Keywords: monetary policy; r-star; monetary transmission mechanism; retirement savings; unconventional monetary policy (search for similar items in EconPapers)
JEL-codes: E21 E43 E44 E52 G51 (search for similar items in EconPapers)
Date: 2025-03
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: Monetary policy along the yield curve: why can central banks affect long-term real rates? (2025)
Working Paper: Monetary Policy Along the Yield Curve: Why Can Central Banks Affect Long-Term Real Rates? (2024)
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