A Note on the Effect of Expected Changes in Monetary Policy on Long-Term Interest Rates
Journal of Applied Economics, Vol. 10, No. 1, pp. 99-114, May 2007
Posted: 7 Jun 2007
The ability of monetary policy to affect long-term interest rates is of central importance for economics and finance. Several recent studies have shown that long-term interest rates are virtually unaffected by monetary policy. This paper develops a statistical methodology to identify the expected and unexpected changes in monetary policy as measured by the federal funds rate. The empirical evidence shows that expected changes in the funds rate cause stronger and more significant movements in the long-term rates. Further, ignoring such asymmetry can erroneously generate the insignificant responses of long-term interest rates to the changes in the monetary policy.
Keywords: long-term interest rate, monetary policy, asymmetry
JEL Classification: E5, C5
Suggested Citation: Suggested Citation