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Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates

Eric Swanson () and John Williams ()

No 20486, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The federal funds rate has been at the zero lower bound for over four years, since December 2008. According to standard macroeconomic models, this should have greatly reduced the effectiveness of monetary policy and increased the efficacy of fiscal policy. However, these models also imply that asset prices and private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current level of the overnight rate. Thus, interest rates with a year or more to maturity are arguably more relevant for asset prices and the economy, and it is unclear to what extent those yields have been affected by the zero lower bound. In this paper, we measure the effects of the zero lower bound on interest rates of any maturity by comparing the sensitivity of those interest rates to macroeconomic news when short-term interest rates were very low to that during normal times. We find that yields on Treasury securities with a year or more to maturity were surprisingly responsive to news throughout 2008-10, suggesting that monetary and fiscal policy were likely to have been about as effective as usual during this period. Only beginning in late 2011 does the sensitivity of these yields to news fall closer to zero. We offer two explanations for our findings: First, until late 2011, market participants expected the funds rate to lift off from zero within about four quarters, minimizing the effects of the zero bound on medium- and longer-term yields. Second, the Fed's unconventional policy actions seem to have helped offset the effects of the zero bound on medium- and longer-term rates.

JEL-codes: E43 E52 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2014-09
Note: AP EFG ME
References: View references in EconPapers View complete reference list from CitEc
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Published as Eric T. Swanson & John C. Williams, 2014. "Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates," American Economic Review, American Economic Association, vol. 104(10), pages 3154-85, October.

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Related works:
Journal Article: Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates (2014) Downloads
Working Paper: Measuring the effect of the zero lower bound on medium- and longer-term interest rates (2012) Downloads
Working Paper: Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates (2012) Downloads
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