Debt Management and the Term Structure of Interest Rates: An Empirical Analysis of Recent Experience

Modigliani, Franco; Sutch, Richard

doi:10.1086/259334

Cited by 192 publications

(80 citation statements)

References 5 publications

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“…In this way, the analysis here provides a measure of the "preferred habitat" channel of the Federal Reserve's balance sheet, consistent with the discussion in Modigliani and Sutch [1967] rather than the aggregate "duration" channel or "signaling" channel, as discussed in Krishnamurthy and Vissing-Jorgensen [2011] or Bauer and Rudebusch [2014], although the weighting in the D t metric does shed some light on the duration channel. And, these metrics can also shed light on some aspects of interest rate determination through the fiscal theory of the price level.…”

Section: Robustness Checks: Other Measuressupporting

confidence: 74%

The Federal Reserve's Portfolio and its Effect on Interest Rates

Huther

Ihrig

Klee

2017

FEDS

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We explore the historical composition of the Federal Reserve's Treasury portfolio and its effect on Treasury yields. Using data from 1985 to 2016, we show that the divergence of the composition of the Federal Reserve's portfolio from overall Treasury securities outstanding is associated with a statistically significant effect on interest rates. In aggregate, when the Federal Reserve's portfolio has shorter maturity than overall Treasury debt outstanding, measures of the term premium are higher at all horizons; likewise, when the Federal Reserve's portfolio has longer maturity, term premiums are lower. In addition, at the individual security level, differences in Federal Reserve holdings from overall Treasury debt outstanding are correlated with measures of pricing errors and liquidity premiums. We discuss the mechanism for this effect, which could include elements of preferred-habitat theory as well as the fiscal theory of the price level.JEL classification: E42, E52, N12, O23.

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Section: Robustness Checks: Other Measuressupporting

confidence: 74%

The Federal Reserve's Portfolio and its Effect on Interest Rates

Huther

Ihrig

Klee

2017

FEDS

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“…The decision to gradually slow the pace of agency purchases was announced in the September 2009 FOMC Statement. 21 See, for example, Modigliani and Sutch (1967). The current program differs from Operation Twist in that the reduction in long-term bonds is financed by reserve creation rather than sales of short-term Treasury bills.…”

Section: Previous Studiesmentioning

confidence: 99%

Large-Scale Asset Purchases by the Federal Reserve: Did They Work?

Raskin²,

et al. 2011

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractSince December 2008, the Federal Reserve's traditional policy instrument, the target federal funds rate, has been effectively at its lower bound of zero. In order to further ease the stance of monetary policy as the economic outlook deteriorated, the Federal Reserve purchased substantial quantities of assets with medium and long maturities. In this paper, we explain how these purchases were implemented and discuss the mechanisms through which they can affect the economy. We present evidence that the purchases led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities, including securities that were not included in the purchase programs. These reductions in interest rates primarily reflect lower risk premiums, including term premiums, rather than lower expectations of future short-term interest rates.

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“…And the idea that supply-and-demand effects can have important consequences in the Treasury market is central to a number of recent papers, including Gagnon et al (2010), Vayanos (2010a, 2010b), Vissing-Jorgensen (2011, 2012), and Vayanos and Vila (2009). An important antecedent to this work is Modigliani and Sutch (1966).…”

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confidence: 96%

Monetary policy and long-term real rates

Hanson

Stein

2015

Journal of Financial Economics

524

244

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Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis-point increase in the 2-year nominal yield on an FOMC announcement day is associated with a 42 basis-point increase in the 10-year forward real rate. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Rather, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that may generate such variation in term premia is based on demand effects coming from "yield-oriented" investors. We find some evidence supportive of this channel.* We thank John Campbell, Gene Fama, Emmanuel Farhi, Robin Greenwood, Anil Kashyap, David Scharfstein, Larry Summers, Adi Sunderam, Paul Tucker, Luis Viceira, and seminar participants at Harvard University for helpful comments. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the Board of Governors.1

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Debt Management and the Term Structure of Interest Rates: An Empirical Analysis of Recent Experience

Cited by 192 publications

References 5 publications

The Federal Reserve's Portfolio and its Effect on Interest Rates

The Federal Reserve's Portfolio and its Effect on Interest Rates

Large-Scale Asset Purchases by the Federal Reserve: Did They Work?

Monetary policy and long-term real rates

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