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

30 Pages Posted: 25 Jul 2011 Last revised: 8 Oct 2013

See all articles by Matthew Greenwood-Nimmo

Matthew Greenwood-Nimmo

University of Melbourne; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Yongcheol Shin

University of York (UK) - Department of Economics and Related Studies

Till van Treeck

Hans-Boeckler-Stiftung - Macroeconomic Policy Institute (IMK)

Byungchul Yu

Dept. of International Trade, Dong-A University

Date Written: October 4, 2013

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

Suggested Citation

Greenwood-Nimmo, Matthew and Shin, Yongcheol and van Treeck, Till and Yu, Byungchul, The Decoupling of Monetary Policy from Long-Term Rates in the U.S. during the Great Moderation (October 4, 2013). Available at SSRN: https://ssrn.com/abstract=1894621 or http://dx.doi.org/10.2139/ssrn.1894621

Matthew Greenwood-Nimmo (Contact Author)

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Yongcheol Shin

University of York (UK) - Department of Economics and Related Studies ( email )

Heslington
York, YO1 5DD
United Kingdom

Till Van Treeck

Hans-Boeckler-Stiftung - Macroeconomic Policy Institute (IMK) ( email )

Hans-Böckler-Straße 39
40476 Düsseldorf
Germany

Byungchul Yu

Dept. of International Trade, Dong-A University ( email )

2-Ga Bumin-Dong
Busan
Korea, Republic of (South Korea)

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