Monetary Policy and Long-Term Real Rates

45 Pages Posted: 20 Dec 2012

See all articles by Samuel Gregory Hanson

Samuel Gregory Hanson

Harvard University - Business School (HBS)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 27, 2012

Abstract

Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis-point increase in the 2-year nominal yield on an FOMC announcement day is associated with a 42 basis-point increase in the 10-year forward real rate. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Rather, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that may generate such variation in term premia is based on demand effects coming from "yield-oriented" investors. We find some evidence supportive of this channel.

Keywords: monetary policy, real interest rates, term premia

JEL Classification: E43, E52

Suggested Citation

Hanson, Samuel Gregory and Stein, Jeremy C., Monetary Policy and Long-Term Real Rates (June 27, 2012). FEDS Working Paper No. 2012-46. Available at SSRN: https://ssrn.com/abstract=2191777 or http://dx.doi.org/10.2139/ssrn.2191777

Samuel Gregory Hanson

Harvard University - Business School (HBS) ( email )

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Jeremy C. Stein (Contact Author)

Harvard University - Department of Economics ( email )

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Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

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