The Aggregate Demand Effects of Short- and Long-Term Interest Rates
31 Pages Posted: 26 Dec 2012
Date Written: July 7, 2012
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: Suggested Citation