Interest rate spreads and forward guidance

62 Pages Posted: 22 Oct 2018

See all articles by Christian Bredemeier

Christian Bredemeier

University of Dortmund - Ruhr Graduate School in Economics

Christoph Kaufmann

European Central Bank

Andreas Schabert

University of Cologne - Department of Economics; University of Dortmund; University of Amsterdam - Faculty of Economics and Business

Date Written: October 16, 2018

Abstract

We provide evidence that liquidity premia on assets that are more relevant for private agents' intertemporal choices than near-money assets increase in response to expansionary forward guidance announcements. We introduce a structural specifi cation of liquidity premia based on assets' differential pledgeability to a basic New Keynesian model to replicate this finding. This model predicts that output and inflation effects of forward guidance do not increase with the length of the guidance period and are substantially smaller than if liquidity premia were neglected. This indicates that there are no puzzling forward guidance effects when endogenous liquidity premia are taken into account.

Keywords: Forward guidance, Unconventional monetary policy, Liquidity premium

JEL Classification: E32, E42, E52

Suggested Citation

Bredemeier, Christian and Kaufmann, Christoph and Schabert, Andreas, Interest rate spreads and forward guidance (October 16, 2018). ECB Working Paper No. 2186. Available at SSRN: https://ssrn.com/abstract=3269138

Christian Bredemeier (Contact Author)

University of Dortmund - Ruhr Graduate School in Economics ( email )

Hohenzollernstr. 1-3
Essen, NRW 45128
Germany

Christoph Kaufmann

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andreas Schabert

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

University of Dortmund ( email )

Vogelpothsweg 87
Dortmund, 44227
Germany
+49 231 755 3288 (Phone)

University of Amsterdam - Faculty of Economics and Business ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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