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Working Paper
Testing the expectations hypothesis: some new evidence for Japan
The deregulation of the Japanese financial markets and the adoption of an interest rate policy instrument by the Bank of Japan prompted a number of empirical investigations of the expectation hypothesis (EH) of the term structures of interest rates in Japan. This paper is a continuation of this research. It deviates from the previous work on the EH in Japan in two respects. It tests the EH by estimating a general vector autoregression (VAR) of the long-term and short-term rates and testing the restrictions implied by the EH on the VAR using a Lagrange multiplier test. In addition, the issue ...
Working Paper
An Evaluation of Event-Study Evidence on the Effectiveness of the FOMC’s LSAP Program: Are the Announcement Effects Identified?
The consensus in monetary policy circles that the Fed?s large-scale asset purchases, known as quantitative easing (QE), have significantly reduced long-term yields is due in part to event studies, which show that long-term yields decline on QE announcement days. However, little attention has been given to whether these announcement effects are identified. This paper contributes to the literature by investigating whether announcement effects associated with the QE announcements used in the literature are identified. The analysis shows that none of announcement effects satisfy the strict ...
Working Paper
Do bank loan rates exhibit a countercyclical mark-up?
Based on a switching-cost model, we examine empirically the hypotheses that bank loan mark-ups are countercyclical and asymmetric in their responsiveness to recessionary and expansionary impulses. The first econometric model treats changes in the mark-up as a continuous variable. The second treats them as an ordered categorical variable due to the discrete nature of prime rate changes. By allowing the variance to switch over time as a Markov process, we present the first conditionally heteroskedastic discrete choice (ordered probit) model for time-series applications. This feature yields a ...
Working Paper
The empirical failure of the expectations hypothesis of the term structure of bond yields
This paper tests the expectations hypothesis (EH) using US monthly data for bond yields spanning the 1952-2003 sample period and ranging in maturity from 1 month to 10 years. We apply the Lagrange multiplier test developed by Bekaert and Hodrick (2001) and extend it to increase the test power: (a) by introducing economic variables as conditioning information; and (b) by using more than two bond yields in the model and testing the EH jointly on more than one pair of yields. While the conventional bivariate procedure provides mixed results, the more powerful testing procedures suggest rejection ...
Journal Article
The borrowed-reserves operating procedures: theory and evidence
Working Paper
Identifying the liquidity effect: the case of nonborrowed reserves
Despite the fact that efforts to identify it empirically have largely been futile, the liquidity effect plays a central role in conventional monetary theory and policy. Recently, however, an increasing volume of empirical work [Christiano and Eichenbaum (1992a,b), Christiano, Eichenbaum and Evans (1994a,b) and Strongin (1995)] has supported the existence of a statistically significant and economically important liquidity effect when nonborrowed reserves is used as the indicator of monetary policy. This paper shows that there is an identification problem associated with using nonborrowed ...
Journal Article
Monetary policy at the zero bound
The average relationship between changes in the 10-year Treasury yield and changes in the funds rate over the 1987-2007 sample period is not indicative of the relationship between changes in the funds rate and changes in the 10-year Treasury yield that existed for more than a decade prior to the financial crisis.
Journal Article
Monetary policy and longer-term rates: an opportunity for greater transparency
The FOMC?s two-pronged approach involves a potential conflict: forward guidance assumes a high degree of substitutability across the maturity structure, while quantitative easing assumes a low degree.