Can Monetary Policy Influence Long Term Interest Rates? It Depends

32 Pages Posted: 7 Jul 2009 Last revised: 29 May 2011

See all articles by David Beckworth

David Beckworth

Mercatus Center at George Mason University

Kenneth P. Moon

Texas State University, San Marcos - Department of Finance and Economics; University of Northern Colorado - Kenneth W. Montfort College of Business

J. Holland Toles

Texas State University, San Marcos

Multiple version iconThere are 2 versions of this paper

Date Written: March 20, 2010

Abstract

Can monetary policy influence long-term interest rates? Studies that have tackled this question using VARs generally find that monetary policy’s influence on long-term interest rates is small and often statistically insignificant. Other studies, however, using a single-equation approach have found a robust relationship. Our study sheds new light on this question by estimating the effect of monetary policy shocks on long-term interest rates in a VAR with long-run monetary neutrality restrictions. We find that U.S. monetary policy can strongly influence long-term interest rates, but only when the Federal Reserve has inflation-fighting credibility and is able to firmly anchor inflationary expectations.

Keywords: Monetary Policy, Treasury Yield Curve, Long-term Interest Rates, Vector Auto Regressions

JEL Classification: E43, E51, E52

Suggested Citation

Beckworth, David and Moon, Kenneth P. and Toles, J. Holland, Can Monetary Policy Influence Long Term Interest Rates? It Depends (March 20, 2010). Available at SSRN: https://ssrn.com/abstract=1430550 or http://dx.doi.org/10.2139/ssrn.1430550

David Beckworth

Mercatus Center at George Mason University ( email )

3434 Washington Blvd. 4th Floor
Arlington, VA 22201
United States

HOME PAGE: http://macromarketbusiness.blogspot.com

Kenneth P. Moon (Contact Author)

Texas State University, San Marcos - Department of Finance and Economics ( email )

San Marcos, TX 78666
United States

University of Northern Colorado - Kenneth W. Montfort College of Business ( email )

Kepner Hall
800 17th Street
Greeley, CO 80639
United States

J. Holland Toles

Texas State University, San Marcos ( email )

601 University Drive
San Marcos, TX 78666-4616
United States
512-245-3242 (Phone)
512-245-3089 (Fax)

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