Working Paper: NBER ID: w20094
Authors: Simon Gilchrist; David López-Salido; Egon Zakrajšek
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: Monetary Policy; Real Borrowing Costs; Zero Lower Bound
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 that lowers the 2-year nominal treasury yield by 10 basis points (E43) | 4 basis point decline in the 10-year nominal treasury yield (E43) |
| Unanticipated easing of monetary policy that lowers the 2-year nominal treasury yield by 10 basis points (E43) | 15 basis point reduction in real investment-grade corporate bond yields (G19) |
| Unanticipated easing of monetary policy that lowers the 2-year nominal treasury yield by 10 basis points (E43) | 12 basis point reduction in the real 30-year mortgage-backed securities yield (E43) |
| Movements in treasury yields in a narrow window around policy announcements are predominantly due to unanticipated changes in the stance of monetary policy (E43) | Allows ruling out potential reverse causality (C22) |
| Unconventional monetary policy (E52) | Significant effects on real borrowing costs (E43) |