Creator: Litterman, Robert B. and Weiss, Laurence M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 179 Stichwort: Money supply, Inflation, Short term rates, and Ex ante rates Fach: E51 - Money Supply; Credit; Money Multipliers and E40 - Money and Interest Rates: General
Creator: Adão, Bernardino, Correia, Isabel, and Teles, Pedro Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 680 Abstract:
We show that short and long nominal interest rates are independent monetary policy instruments. The pegging of both helps solving the problem of multiplicity that arises when only short rates are used as the instrument of policy. A peg of the nominal returns on assets of different maturities is equivalent to a peg of state-contingent interest rates. These are the rates that should be targeted in order to implement unique equilibria. At the zero bound, while it is still possible to target state-contingent interest rates, that is no longer equivalent to the target of the term structure.
Stichwort: Term structure, Long rates, Monetary policy, Maturities, Multiplicity of equilibria, Monetary policy instruments, Sticky prices, and Short rates Fach: E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data), and E40 - Money and Interest Rates: General
Creator: Hur, Sewon, Kondo, Illenin O., and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 574 Abstract:
This paper argues that the comovement between inflation and economic activity is an important determinant of real interest rates over time and across countries. First, we show that for advanced economies, periods with more procyclical inflation are associated with lower real rates, but only when there is no risk of default on government debt. Second, we present a model of nominal sovereign debt with domestic risk-averse lenders. With procyclical inflation, nominal bonds pay out more in bad times, making them a good hedge against aggregate risk. In the absence of default risk, procyclical inflation yields lower real rates. However, procyclicality implies that the government needs to make larger (real) payments when the economy deteriorates, which could increase default risk and trigger an increase in real rates. The patterns of real rates predicted by the model are quantitatively consistent with those documented in the data.
Stichwort: Nominal bonds, Inflation risk, Government debt, and Sovereign default Fach: F34 - International Lending and Debt Problems, E31 - Price Level; Inflation; Deflation, G12 - Asset Pricing; Trading Volume; Bond Interest Rates, and H63 - National Debt; Debt Management; Sovereign Debt
Creator: Chari, V. V., Christiano, Lawrence J., and Eichenbaum, Martin S. Series: Finance, fluctuations, and development Abstract:
Different monetary aggregates covary very differently with short term nominal interest rates. Broad monetary aggregates like Ml and the monetary base covary positively with current and future values of short term interest rates. In contrast, the nonborrowed reserves of banks covary negatively with current and future interest rates. Observations like this 'sign switch' lie at the core of recent debates about the effects of monetary policy actions on short term interest rates. This paper develops a general equilibrium monetary business cycle model which is consistent with these facts. Our basic explanation of the 'sign switch' is that movements in nonborrowed reserves are dominated by exogenous shocks to monetary policy, while movements in the base and Ml are dominated by endogenous responses to non-policy shocks.
Stichwort: Monetary policy, Interest, Money, Shocks, Inside money, and Interest rates Fach: E43 - Money and interest rates - Determination of interest rates ; Term structure of interest rates and E51 - Monetary policy, central banking, and the supply of money and credit - Money supply ; Credit ; Money multipliers
Creator: Bullard, James and Russell, Steven Series: Finance, fluctuations, and development Abstract:
We examine the conditions under which steady states with low real interest rates—real rates substantially below the output growth rate—exist in an overlapping generations model with production, capital accumulation, a labor-leisure trade-off, technological progress, and agents who live for many periods. The number of periods in an agent's life (n) is left open for much of the analysis and determines the temporal interpretation of a time period. The qualitative properties of the model are largely invariant to different values of n. We find that two low real interest rate steady states exist for empirically plausible values of the parameters of the model. Outside liabilities such as fiat currency or unbacked government debt are valued in one of these steady states.
Stichwort: Interest rates, Debts, Public, and General equilibrium models Fach: E40 - Money and interest rates - General and D51 - General equilibrium and disequilibrium - Exchange and production economies
Creator: Alvarez, Fernando, 1964-, Atkeson, Andrew, and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 260 Abstract:
This paper analyses the effects of open market operations on interest rates in a model in which agents must pay a fixed cost to exchange assets and cash. Asset markets are endogenously segmented in that some agents choose to pay the fixed cost and some do not. When the fixed cost is zero, the model reduces to the standard one in which persistent money injections increase nominal interest rates, flatten the yield curve, and lead to a downward-sloping yield curve on average. In contrast, if markets are sufficiently segmented, then persistent money injections decrease interest rates, steepen or even twist the yield curve, and lead to an upward-sloping yield curve on average.
Fach: E52 - Monetary Policy and E43 - Interest Rates: Determination, Term Structure, and Effects
Creator: Neumeyer, Pablo Andrés and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 335 Abstract:
We find that in a sample of emerging economies business cycles are more volatile than in developed ones, real interest rates are countercyclical and lead the cycle, consumption is more volatile than output and net exports are strongly countercyclical. We present a model of a small open economy, where the real interest rate is decomposed in an international rate and a country risk component. Country risk is affected by fundamental shocks but, through the presence of working capital, also amplifies the effects of those shocks. The model generates business cycles consistent with Argentine data. Eliminating country risk lowers Argentine output volatility by 27% while stabilizing international rates lowers it by less than 3%.
Stichwort: Working capital, International business cycles, Financial crises, Country risk, and Sudden stops Fach: F32 - Current Account Adjustment; Short-term Capital Movements, F41 - Open Economy Macroeconomics, and E32 - Business Fluctuations; Cycles
Creator: Alvarez, Fernando, 1964-, Atkeson, Andrew, and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 278 Abstract:
This paper analyzes the effects of money injections on interest rates and exchange rates in a model in which agents must pay a Baumol-Tobin style fixed cost to exchange bonds and money. Asset markets are endogenously segmented because this fixed cost leads agents to trade bonds and money only infrequently. When the government injects money through an open market operation, only those agents that are currently trading absorb these injections. Through their impact on these agents’ consumption, these money injections affect real interest rates and real exchange rates. We show that the model generates the observed negative relation between expected inflation and real interest rates. With moderate amounts of segmentation, the model also generates other observed features of the data: persistent liquidity effects in interest rates and volatile and persistent exchange rates. A standard model with no fixed costs can produce none of these features.
Stichwort: Term structure of interest rates, Volatile real exchange rates, Liquidity effects, Fixed costs, and Baumol-Tobin model Fach: E40 - Money and Interest Rates: General, F41 - Open Economy Macroeconomics, E52 - Monetary Policy, E43 - Interest Rates: Determination, Term Structure, and Effects, and F31 - Foreign Exchange