Working Paper: NBER ID: w8839
Authors: John H. Cochrane; Monika Piazzesi
Abstract: We measure monetary policy shocks as changes in the Fed funds target rate that surprise bond markets in daily data. These shock series avoid the omitted variable, time-varying parameter, and orthogonalization problem of monthly VARs, and do not impose the expectations hypothesis. We find surprisingly large and persistent responses of bond yields to these shocks. 10 year rates rise as much as 8/10 of a percent to a one percent target shock. The usual view that monetary policy only temporarily raises long term rates and influences inflation would lead one to predict a negative long rate response.
Keywords: No keywords provided
JEL Codes: E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unexpected changes in the fed funds target rate (E52) | significant and persistent responses in bond yields (E43) |
| monetary policy shocks (E39) | rise in 10-year bond yields (E43) |
| 1% increase in the target rate (E52) | rise in 10-year bond yields (E43) |
| unexpected target changes (E61) | stronger relationship with interest rates (E43) |
| Fed's actions (E52) | not lead to lower inflation (E31) |