Greenspan's Conundrum and the Fed's Ability to Affect Long‐Term Yields

Thornton, Daniel L.

doi:10.1111/jmcb.12469

Cited by 8 publications

(12 citation statements)

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“…The model suggests that Greenspan's conundrum period, that is, the lack of a response of longterm yields to the Fed's 2004/06 tightening, was associated with a gradual decline in the correlation between expected short-rate shocks and term premium shocks from 0.8 to −0.4. More generally, the low average correlation between those shocks is related to the observation that in the last two decades the link between short-and long-term interest rates has been largely severed (e.g., Thornton (2012)). It also casts light on the conclusion in recent literature that the Fed is able to influence the expectations of the short rate at long horizons, as suggested by the strong impact of monetary policy shocks on long-term yields (Nakamura and Steinsson (2013), Hanson and Stein (2015)).…”

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confidence: 99%

Information in the Term Structure of Yield Curve Volatility

Cieślak

Povala

2016

The Journal of Finance

101

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We study information in the volatility of US Treasuries. We propose a no-arbitrage term structure model with a stochastic covariance of risks in the economy, and estimate it using high-frequency data and options. We identify volatilities of the expected short rate and of the term premium. Volatility of short rate expectations rises ahead of recessions and during stress in financial markets, while term premium volatility increases in the aftermath. Volatile short rate expectations predict economic activity independently of the term spread at horizons up to one year, and are related to measures of monetary policy uncertainty. The term premium volatility comoves with a more general level of economic policy uncertainty. We also study channels through which volatility affects model-based inference about the yield curve. A vast literature studies and decomposes the information contained in the nominal Treasury yield curve. Perspectives vary from latent factors, reduced-form macro-finance models, through structural settings but most of the time they serve the objective of understanding the Treasury risk premia and short rate expectations. The majority of the recent term structure literature has tackled this and related questions assuming constant volatility. That focus can be justified with tractability and the known difficulties with the joint modeling of the first and second moments of yields. Consequently, relatively little is known about information embedded in the Treasury market volatility. As the largest and the most liquid debt market in the world, US Treasuries provide investors, central banks and governments worldwide not only with the store of value and liquidity but also serve as the main source of collateral in various transactions. The fluctuations in Treasury yields and in their volatility have impact on a range of asset markets. A rise in interest rate volatility may signal macroeconomic uncertainty, but might also lead to an increase in haircuts for Treasury bonds used as collateral in about half of the repo transactions, and thus diminish the lending capacity in the financial system. 1 These considerations make the understanding of interest rate volatility especially compelling. In this paper, we ask what we can learn about the term structure and the economy by studying the time-varying second moments of the Treasury yield curve. Relative to the previous literature, our approach is comprised of several new elements: First, to identify the properties of interest rate volatility, we rely on nearly 20 years worth of high-frequency data on transactions in the US Treasury market. The dataset allows us to construct the realized covariance matrix of zero-coupon yields across different maturities. Additionally, we augment the realized co-volatility estimates with information from Treasury derivatives, covering risk-adjusted market expectations of volatility at several points along the yield curve. Second, we propose a no-arbitrage term structure model that is able to accommodate the multivariate dynamics of y...

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confidence: 99%

Information in the Term Structure of Yield Curve Volatility

Cieślak

Povala

2016

The Journal of Finance

101

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“…Longer term rates have stronger macroeconomic effects, as our quote from the US Council of Economic Advisers above suggests (see also Thornton, 2012). On the other hand, unconventional measures might be associated with welfare costs when affecting the slope of the yield curve away from its market-driven equilibrium value.…”

Section: Introductionmentioning

confidence: 84%

Should Unconventional Monetary Policies Become Conventional?

Quint

Rabanal²

2017

IMF Working Papers

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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. at a large scale after short-term policy rates reached their effective lower bound. In this paper, we study if this new set of tools, commonly labeled as unconventional monetary policies (UMP), should still be used when economic conditions and interest rates normalize. We study the optimality of UMP by using an estimated non-linear DSGE model with a banking sector and long-term private and public debt for the United Terms of use: Documents in EconStor mayStates. We find that the benefits of using UMP in normal times are substantial, equivalent to 1.45 percent of consumption. However, the benefits from using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks. When more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.JEL Codes: C32, E32, E52

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“…Other contributions, however, reject a clear response and co‐movement of the long‐term interest rates after a change in the policy rate. For the sub‐periods 1983–1990, 1991–2000 and 2001–2007, Thornton (2012) calculates a decreasing response to a change in FF, with even a slight negative correlation in the last period when considering private AAA bonds. Akhtar (1995) and Mehra (1996) point out that the effect would hold only in the short run because in the long run the monetary policy is neutral and the real interest rate is determined by the rate of return on capital, that is, the expected long‐term real rate is mean stationary and unrelated in the long run to the level of the FF (see, also Cagan, 1972).…”

Section: The Empirical Literature On the Relationships Between Short‐mentioning

confidence: 99%

Monetary policy and long‐term interest rates: Evidence from the U.S. economy

Deleidi

Levrero

2020

Metroeconomica

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This paper addresses the ability of central banks to affect the structure of interest rates. We assess the causal relationship between the short‐term Effective Federal Funds Rate (FF) and long‐term interest rates associated with both public and private bonds and specifically, the 10‐Year Treasury Bond (GB10Y) and the Moody's Aaa Corporate Bond (AAA). To do this, we apply Structural Vector Autoregressive models to U.S. monthly data for the 1954–2018 period. Based on results derived from impulse response functions and forecast error variance decomposition, we find: a bidirectional relationship when GB10Y is considered as the long‐term rate and a unidirectional relationship that moves from short‐ to long‐term interest rates when AAA is considered. These conclusions show that monetary policy is able to permanently affect long‐term interest rates and the central bank has a certain degree of freedom in setting the levels of the short‐term policy rate.

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Greenspan's Conundrum and the Fed's Ability to Affect Long‐Term Yields

Cited by 8 publications

References 67 publications

Information in the Term Structure of Yield Curve Volatility

Information in the Term Structure of Yield Curve Volatility

Should Unconventional Monetary Policies Become Conventional?

Monetary policy and long‐term interest rates: Evidence from the U.S. economy

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