Working Paper

How sensitive is the economy to large interest rate increases? Evidence from the taper tantrum

Abstract: The “taper tantrum” of 2013 represents one of the largest monetary policy shocks since the 1980s. During this episode, long-term interest rates spiked 100 basis points—a move unintentionally induced by policymakers. However, this had no observable negative effect on the overall U.S. economy. Output, employment, and other important variables, all performed either in line with or better than consensus forecasts, often improving considerably relative to their earlier trends. We conclude that, from low levels, a 100 basis point increase in long-term interest rates is probably too small to affect overall economic activity and discuss the implications for monetary policy.

Keywords: monetary policy; federal reserve; taper tantrum; quantitative easing;

JEL Classification: E43; E44; E52; E58;

https://doi.org/10.17016/FEDS.2022.085

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2022-12

Number: 2022-085