Interest Rate Spreads and Forward Guidance
Andreas Schabert and
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Andreas Schabert: University of Cologne
No 491, 2018 Meeting Papers from Society for Economic Dynamics
Announcements of future monetary policy rate changes have been found to be imperfectly passed through to various interest rates. We provide evidence for rates of return on less liquid assets to respond by less than, e.g., treasury rates to forward guidance announcements of the US Federal Reserve, suggesting that single-interest-rate models tend to overestimate their macroeconomics effects. We apply a macroeconomic model with interest rate spreads stemming from differential pledgeability of assets, implying that assets provide liquidity services to different extents. Consistent with empirical evidence, announcements of future reductions in the policy rate lead to an increase in liquidity premia. The output effects of forward guidance do not increase with length of the guidance period and are substantially less pronounced than they are predicted to be by a standard New Keynesian model. We thereby provide a solution to the so-called "forward guidance puzzle".
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Working Paper: Interest rate spreads and forward guidance (2018)
Working Paper: Interest Rate Spreads and Forward Guidance (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:491
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