The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission

51 Pages Posted: 10 Oct 2019

See all articles by Zhengyang Chen

Zhengyang Chen

University of Texas at Dallas - School of Economic, Political and Policy Sciences

Date Written: September 30, 2019

Abstract

The federal funds rate became uninformative about the stance of monetary policy from December 2008 to November 2015. During the same period, unconventional monetary policy actions, like large-scale asset purchases, show the Federal Reserve’s intention to depress longer-term interest rates. This paper considers a long-term real interest rate as an alternative monetary policy indicator in a structural VAR framework. Based on an event study of FOMC announcements, I advance a novel measure of long-term interest rate volatility with important implication for monetary policy identification. I find that monetary policy shocks identified with this volatility measure drive significant swings in credit market sentiments and real output. In contrast, monetary policy shocks identified by otherwise standard unexpected policy rate changes lead to muted responses of financial frictions and production. Our results support the validity of the risk-taking channel and suggest an indispensable role of financial markets in monetary policy transmission.

Keywords: Monetary policy transmission, Risk-taking channel, Structural vector autoregression, High-frequency identification

JEL Classification: E3, E4, E5

Suggested Citation

Chen, Zhengyang, The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission (September 30, 2019). Available at SSRN: https://ssrn.com/abstract=3462101 or http://dx.doi.org/10.2139/ssrn.3462101

Zhengyang Chen (Contact Author)

University of Texas at Dallas - School of Economic, Political and Policy Sciences ( email )

P.O. Box 830688, GR 31
Richardson, TX 75083
United States

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