Changes in Monetary Policy and the Variation in Interest Rate Changes Across Credit Markets

29 Pages Posted: 16 Dec 2012

See all articles by Devin Reilly

Devin Reilly

University of Pennsylvania - Department of Economics

Pierre-Daniel G. Sarte

Federal Reserve Bank of Richmond

Date Written: 2010

Abstract

This article uses principal component methods to assess the importance of changes in the federal funds rate in driving interest rate changes across a broad array of credit markets. We find that most of the variability in interest rate changes across these markets is explained by a small number of common components. Furthermore, for many of the interest rate series in our sample, changes that reflect common movements are highly correlated with changes in the federal funds rate. However, in some credit markets associated with longer maturities, such as the mortgage market, common movements are less correlated with changes in the federal funds rate. Therefore, interest rate changes in those markets are i) more likely to reflect aggregate disturbances somewhat unrelated to monetary policy, or ii) related to contemporaneous monetary policy more indirectly through changes in expected future short rates. We also find evidence that movements in the auto loan market are almost entirely driven by idiosyncratic considerations rather than changes in the federal funds rate.

Suggested Citation

Reilly, Devin and Sarte, Pierre-Daniel, Changes in Monetary Policy and the Variation in Interest Rate Changes Across Credit Markets (2010). FRB Richmond Economic Quarterly, vol. 96, no. 2, Second Quarter 2010, pp. 201-229. Available at SSRN: https://ssrn.com/abstract=2189116

Devin Reilly

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

Pierre-Daniel Sarte (Contact Author)

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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