The Fed and Interest Rates: A High-Frequency Identification

17 Pages Posted: 23 Mar 2002 Last revised: 28 Aug 2022

See all articles by John H. Cochrane

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER)

Monika Piazzesi

Stanford University; University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: March 2002

Abstract

We measure monetary policy shocks as changes in the Fed funds target rate that surprise bond markets in daily data. These shock series avoid the omitted variable, time-varying parameter, and orthogonalization problem of monthly VARs, and do not impose the expectations hypothesis. We find surprisingly large and persistent responses of bond yields to these shocks. 10 year rates rise as much as 8/10 of a percent to a one percent target shock. The usual view that monetary policy only temporarily raises long term rates and influences inflation would lead one to predict a negative long rate response.

Suggested Citation

Cochrane, John H. and Piazzesi, Monika, The Fed and Interest Rates: A High-Frequency Identification (March 2002). NBER Working Paper No. w8839, Available at SSRN: https://ssrn.com/abstract=305062

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Monika Piazzesi

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