Monetary policy and long-term real rates

Samuel Hanson and Jeremy Stein

No 2012-46, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis-point increase in the 2-year nominal yield on an FOMC announcement day is associated with a 42 basis-point increase in the 10-year forward real rate. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Rather, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that may generate such variation in term premia is based on demand effects coming from \"yield-oriented\" investors. We find some evidence supportive of this channel.

Date: 2012
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (14)

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Journal Article: Monetary policy and long-term real rates (2015)
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