The Aggregate Demand Effects of Short- and Long-Term Interest Rates

31 Pages Posted: 26 Dec 2012

See all articles by Michael T. Kiley

Michael T. Kiley

Board of Governors of the Federal Reserve System

Date Written: July 7, 2012

Abstract

I develop empirical models of the U.S. economy that distinguish between the aggregate demand effects of short- and long-term interest rates-one with clear "microfoundations" and one more loosely motivated. These models are estimated using government and private long-term bond yields. Estimation results suggest short- and long-term interest rates both influence aggregate spending. The results indicate that the short-term interest rate has a larger influence on economic activity, through its impact on the entire term structure, than term and risk premiums (for equal-sized movements in long-term interest rates). Potential policy implications are discussed.

Keywords: IS curve, long-term interest rates

JEL Classification: E43, E44, E50

Suggested Citation

Kiley, Michael T., The Aggregate Demand Effects of Short- and Long-Term Interest Rates (July 7, 2012). FEDS Working Paper No. 2012-54. Available at SSRN: https://ssrn.com/abstract=2193893 or http://dx.doi.org/10.2139/ssrn.2193893

Michael T. Kiley (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2448 (Phone)
202-452-5296 (Fax)

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