Can Monetary Policy Influence Long Term Interest Rates? It Depends
32 Pages Posted: 7 Jul 2009 Last revised: 29 May 2011
Date Written: March 20, 2010
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: Suggested Citation