Euler equations and money market interest rates: The role of monetary and risk premium shocks

Johannes Gareis () and Eric Mayer

No 89, W.E.P. - Würzburg Economic Papers from University of Würzburg, Department of Economics

Abstract: This paper challenges the view that the observed negative correlation between the Federal Funds rate and the interest rate implied by consumption Euler equations is systematically linked to monetary policy. By using a Monte Carlo experiment, we show that stochastic risk premium disturbances have the capability to drive a wedge between the interest rate targeted by the central bank and the implied Euler equation interest rate such that the correlation between actual and implied rates is negative.

Keywords: Euler Interest Rate; Monetary Policy; Risk Premium Shocks (search for similar items in EconPapers)
JEL-codes: E10 E43 E44 E52 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:wuewep:89

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