The Decoupling of Monetary Policy from Long-Term Rates in the U.S. during the Great Moderation

Abstract

Monetary theory typically assumes that the pass-through from policy-controlled interest rates to longer term rates and yields is complete, rapid and symmetric. We investigate these assumptions by applying the Nonlinear ARDL (NARDL) model advanced by Shin, Yu and Greenwood-Nimmo (2013) to the analysis of interest rate pass-through in the U.S. We find five stylised findings as follows: (i) rate cuts are passed through more completely than rate hikes in the long-run; (ii) rate hikes are passed through more rapidly than rate cuts in the short-run; (iii) pass-through has become less complete during the Great Moderation; (iv) the speed of adjustment has increased during the Great Moderation; and (v) the 2003-5 decoupling 'conundrum' identified by Alan Greenspan is statistically indistinct from previous monetary contractions. Where pass-through exhibits such complexities, our findings suggest that demand management policies involving manipulation of the short-term interest rate may encounter significant difficulties in the absence of regulatory reform.

Keywords: nonlinear autoregressive distributed lag (NARDL) model, asymmetric interest rate pass-through, great moderation, Greenspan decoupling conundrum

JEL Classification: C22, E43, E52