Working Paper: CEPR ID: DP9971
Authors: Simon Gilchrist; J. David López-Salido; Egon Zakrajsek
Abstract: This paper compares the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB). For the ZLB period, we identify two policy surprises: changes in the 2-year Treasury yield around policy announcements and changes in the 10-year Treasury yield that are orthogonal to those in the 2-year yield. The efficacy of unconventional policy in lowering real borrowing costs is comparable to that of conventional policy, in that it implies a complete pass-through of policy-induced movements in Treasury yields to comparable-maturity private yields.
Keywords: corporate bond yields; forward guidance; LSAPs; mortgage interest rates; term premia; unconventional monetary policy
JEL Codes: E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unanticipated easing of monetary policy lowers the 2-year nominal treasury yield by 10 basis points (E43) | induces a 4 basis point decline in the 10-year nominal treasury yield (E43) |
| Unanticipated easing of monetary policy lowers the 2-year nominal treasury yield by 10 basis points (E43) | leads to a 7 basis point reduction in the real 3-year corporate bond yield for investment-grade non-financial firms (G32) |
| Unanticipated easing of monetary policy lowers the 2-year nominal treasury yield by 10 basis points (E43) | causes a 15 basis point reduction in real investment-grade corporate bond yields (E43) |
| Unconventional monetary policy actions targeting the long end of the yield curve (E52) | lead to a 12 basis point reduction in real mortgage borrowing costs (G21) |
| Policy surprises affecting longer-term interest rates (E43) | approximately 40-50% of the variation in real long-term borrowing costs during the ZLB period can be attributed (E43) |