What does Monetary Policy do to Long-term Interest Rates at the Zero Lower Bound?

This article uses a structural VAR with daily data to identify the effects of monetary policy shocks on various longer term interest rates since the federal funds rate has been stuck at the zero lower bound. The VAR is identified using the assumption that monetary policy shocks are heteroskedastic:...

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Bibliographic Details
Published in:	The Economic journal (London) Vol. 122; no. 564; pp. F447 - F466
Main Author:	Wright, Jonathan H.
Format:	Journal Article
Language:	English
Published:	Oxford, UK Blackwell Publishing Ltd 01-11-2012 Wiley-Blackwell Oxford University Press
Subjects:	Corporate bonds Economic shock FEATURE: UNCONVENTIONAL MONETARY POLICY AFTER THE FINANCIAL CRISIS Federal funds rate Federal Reserve monetary policy Interest rates Long term Monetary policy Mortgage backed securities Quantitative easing Speeches Statistical variance Studies Treasury Variance Vector autoregression Vector-autoregressive models Yield Zero bound
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Summary:	This article uses a structural VAR with daily data to identify the effects of monetary policy shocks on various longer term interest rates since the federal funds rate has been stuck at the zero lower bound. 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 otherwise nothing unusual about these days. 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.
Bibliography:	ArticleID:ECOJ2556 Corresponding author: Jonathan H. Wright, Department of Economics, Johns Hopkins University, Baltimore, MD 21218, USA. Email: wrightj@jhu.edu. istex:31BA03369DA56D7C1B5FA07B6744174ADD55E783 ark:/67375/WNG-SD0VBTKZ-3 wrightj@jhu.edu I am grateful to an anonymous referee, Tobias Adrian, Joseph Gagnon, Refet Gürkaynak, Andrew Scott, Eric Swanson and participants at the Bank of England conference on quantitative easing and unconventional monetary policy for their very helpful comments on earlier drafts. All errors are my sole responsibility. . Corresponding author: Jonathan H. Wright, Department of Economics, Johns Hopkins University, Baltimore, MD 21218, USA. Email ObjectType-Article-2 SourceType-Scholarly Journals-1 ObjectType-Feature-1 content type line 23
ISSN:	0013-0133 1468-0297
DOI:	10.1111/j.1468-0297.2012.02556.x