Volatility, Money Market Rates, and the Transmission of Monetary Policy

Seth B. Carpenter () and Selva Demiralp
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Seth B. Carpenter: Division of Monetary Affairs Board of Governors of the Federal Reserve System

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: We explore the effect of volatility in the federal funds market on the expectations hypothesis in money markets. We find that lower volatility in the bank funding markets market, all else equal, leads to a lower term premium and thus longer-term rates for a given setting of the overnight rate. The results appear to hold for the US as well as the Euro Area and the UK. The results have implications for the design of operational frameworks for the implementation of monetary policy and for the interpretation of the changes in the Libor-OIS spread during the financial crisis

Keywords: Monetary transmission mechanism; expectations hypothesis; term premium (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-10
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Volatility, money market rates, and the transmission of monetary policy (2011)
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