Working Paper: NBER ID: w17154
Authors: Jonathan H. Wright
Abstract: The federal funds rate has been stuck at the zero bound for over two years and the Fed has turned to unconventional monetary policies, such as large scale asset purchases to provide stimulus to the economy. This paper uses a structural VAR with daily data to identify the effects of monetary policy shocks on various longer-term interest rates during this period. The VAR is identified using the assumption that monetary policy shocks are heteroskedastic: monetary policy shocks have especially high variance on days of FOMC meetings and certain speeches, while there is nothing unusual about these days from the perspective of any other shocks to the economy. A complementary high-frequency event-study approach is also used. I find that stimulative monetary policy shocks lower Treasury and corporate bond yields, but the effects die off fairly fast, with an estimated half-life of about two months.
Keywords: Monetary Policy; Interest Rates; Zero Lower Bound; Quantitative Easing
JEL Codes: C22; E43; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks (E39) | Reduction in treasury yields (E43) |
| Monetary policy shocks (E39) | Reduction in corporate bond yields (G12) |
| Monetary policy shocks (E39) | Decrease in two-year treasury yields (E43) |
| Monetary policy shocks (E39) | Shifts in breakeven rates from TIPS (E43) |
| Monetary policy shocks (E39) | Reduction in long-maturity corporate bond yields (E43) |