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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.
Palavra-chave: Monetary policy, Interest, Money, Shocks, Inside money, and Interest rates Sujeito: 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: 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.
Palavra-chave: Term structure, Long rates, Monetary policy, Maturities, Multiplicity of equilibria, Monetary policy instruments, Sticky prices, and Short rates Sujeito: 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: 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.
Sujeito: E52 - Monetary Policy and E43 - Interest Rates: Determination, Term Structure, and Effects
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.
Palavra-chave: Term structure of interest rates, Volatile real exchange rates, Liquidity effects, Fixed costs, and Baumol-Tobin model Sujeito: 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
Creator: Aiyagari, S. Rao, Wallace, Neil, and Wright, Randall D. Series: Lucas expectations anniversary conference Abstract:
A pairwise random meeting model with money is used to study the nominal yield on pure-discount, default-free securities that are issued by the government. There is one steady state with matured securities at par and, for some parameters, another with them at a discount. In the former, exogenous rejection of unmatured securities by the government is necessary and sufficient for such a steady state to display a positive nominal yield on unmatured securities. In the latter, the post-maturity discount on securities induces a deeper pre-maturity discount even if there is no exogenous rejection of unmatured securities.
Palavra-chave: Maturity, Government securities, and Interest rates Sujeito: E02 - Institutions and the Macroeconomy and E43 - Interest Rates: Determination, Term Structure, and Effects
Creator: Aiyagari, S. Rao, Wallace, Neil, and Wright, Randall D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 550 Abstract:
A random matching model with money is used to study the nominal yield on small denomination, bearer, safe, discount securities issued by the government. There is always one steady state with matured securities circulating at par and, for some parameters, another with them circulating at a discount. In the former, a necessary and sufficient condition for a positive nominal yield on not-yet-matured securities is exogenous discriminatory treatment of them by the government. In the latter, the post-maturity discount on securities induces a deeper pre-maturity discount even without such discriminatory treatment.
Palavra-chave: Money, Interest rates, and Monetary policy Sujeito: E43 - Interest Rates: Determination, Term Structure, and Effects, E41 - Demand for Money, E40 - Money and Interest Rates: General, and E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Creator: Alvarez, Fernando, 1964-, Atkeson, Andrew, and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 627 Abstract:
Time-varying risk is the primary force driving nominal interest rate differentials on currency-denominated bonds. This finding is an immediate implication of the fact that exchange rates are roughly random walks. We show that a general equilibrium monetary model with an endogenous source of risk variation—a variable degree of asset market segmentation—can produce key features of actual interest rates and exchange rates. The endogenous segmentation arises from a fixed cost for agents to exchange money for assets. As inflation varies, the benefit of asset market participation varies, and that changes the fraction of agents participating. These effects lead the risk premium to vary systematically with the level of inflation. Our model produces variation in the risk premium even though the fundamental shocks have constant conditional variances.
Palavra-chave: Time-varying conditional variances, Pricing kernel, Fama puzzle, Segmented markets, Forward premium anomaly, and Asset pricing-puzzle Sujeito: F31 - Foreign Exchange, F41 - Open Economy Macroeconomics, G15 - International Financial Markets, G12 - Asset Pricing; Trading Volume; Bond Interest Rates, F30 - International Finance: General, and E43 - Interest Rates: Determination, Term Structure, and Effects
Creator: Diba, Behzad and Oh, Seonghwan Series: Business analysis committee meeting Abstract:
This paper reports some empirical evidence on the relation between the expected real interest rate and monetary aggregates in postwar U.S. data. We find some evidence against the hypothesis, implied by the Real Business Cycle model of Litterman and Weiss (1985), that the expected real interest rate follows a univariate autoregressive process, not Granger-caused by monetary aggregates. Our findings, however, are consistent with a more general bivariate model--suggested by what Barro (1987, Chapter 5) refers to as "the basic market-clearing model"--in which the real rate depends on its own lagged values and on lagged output. Taking this bivariate model as our null hypothesis, we find no evidence that money-stock changes have a significant liquidity effect on the expected real interest rate.
Sujeito: E51 - Monetary policy, central banking, and the supply of money and credit - Money supply ; Credit ; Money multipliers, E32 - Prices, business fluctuations, and cycles - Business fluctuations ; Cycles, and E43 - Money and interest rates - Determination of interest rates ; Term structure of interest rates