Creator: Monnet, Cyril and Weber, Warren E. Series: Quarterly review (Federal Reserve Bank of Minneapolis. Research Department) Number: Vol. 25, No. 4 Abstract:
This study describes and reconciles two common, seemingly contradictory views about a key monetary policy relationship: that between money and interest rates. Data since 1960 for about 40 countries support the Fisher equation view, that these variables are positively related. But studies taking expectations into account support the liquidity effect view, that they are negatively related. A simple model incorporates both views and demonstrates that which view applies at any time depends on when the change in money occurs and how long the public expects it to last. A surprise money change that is not expected to change future money growth moves interest rates in the opposite direction; one that is expected to change future money growth moves interest rates in the same direction. The study also demonstrates that stating monetary policy as a rule for interest rates rather than money does not change the relationship between these variables.
Creator: Willes, Mark H. Series: Quarterly review (Federal Reserve Bank of Minneapolis. Research Department) Number: Vol. 2, No. 4
Creator: Litterman, Robert B. and Weiss, Laurence M. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 179 Keyword: Money supply, Inflation, Short term rates, and Ex ante rates Subject (JEL): 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.
Keyword: Sticky prices, Maturities, Long rates, Monetary policy instruments, Term structure, Short rates, Monetary policy, and Multiplicity of equilibria Subject (JEL): E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E40 - Money and Interest Rates: General, and E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
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.
Keyword: Sovereign default, Inflation risk, Nominal bonds, and Government debt Subject (JEL): 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: Aiyagari, S. Rao Series: Quarterly review (Federal Reserve Bank of Minneapolis. Research Department) Number: Vol. 9, No. 1
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.
Keyword: Monetary policy, Interest, Money, Shocks, Inside money, and Interest rates Subject (JEL): 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.
Keyword: Interest rates, Debts, Public, and General equilibrium models Subject (JEL): 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.
Subject (JEL): E52 - Monetary Policy and E43 - Interest Rates: Determination, Term Structure, and Effects