Search Results
Discussion Paper
Measuring the Natural Rate of Interest: The Role of Inflation Expectations
The "natural" or equilibrium real rate of interest is an important concept in macroeconomics. On the one hand, the natural (real) rate provides a description of the real interest rate path consistent with the eventual full capacity of utilization of available resources in the context of low and stable inflation.
Working Paper
Term structure modelling with supply factors and the Federal Reserve's Large Scale Asset Purchase programs
This paper proposes and estimates an arbitrage-free term structure model with both observable yield factors and Treasury and Agency MBS supply factors, and applies it to evaluate the term premium effects of Federal Reserve's Large Scale Asset Purchase programs. Our estimates show that the first and the second large-scale asset purchase programs and the Maturity Extension program have a combined effect of about 100 basis points on the 10-year Treasury yield.
Working Paper
Inflation Disagreement Weakens the Power of Monetary Policy
Household inflation disagreement weakens the impact of forward guidance and monetary policy shocks, especially when inflation forecasts are positively skewed. This attenuation effect is not driven by endogenous responses of inflation disagreement to contemporaneous shocks. A model with heterogeneous beliefs about the central bank’s inflation target explains these observations. Agents expecting higher future inflation perceive lower real interest rates and borrow more, constrained by borrowing limits. Increased inflation disagreement results in more borrowing-constrained agents, leading to ...
Working Paper
Confidence intervals for long-horizon predictive regressions via reverse regressions
Long-horizon predictive regressions in finance pose formidable econometric problems when estimated using the sample sizes that are typically available. A remedy that has been proposed by Hodrick (1992) is to run a reverse regression in which short-horizon returns are projected onto a long-run mean of some predictor. By covariance stationarity, the slope coefficient is zero in the reverse regression if and only if it is zero in the original regression, but testing the hypothesis in the reverse regression avoids small sample problems. Unfortunately this only allows us to test the null of no ...
Discussion Paper
Projected Evolution of the SOMA Portfolio and the 10-Year Treasury Term Premium Effect
An earlier Feds note used staff models to provide a projection for the evolution of the SOMA portfolio and an estimate of the associated term premium effect (TPE) on the 10-year Treasury yield. That analysis relied on economic, financial, and monetary policy assumptions as of April 2017. With the Federal Open Market Committee (FOMC) announcing a change in its reinvestment policy in its September 2017 post-meeting statement, this note provides updated projections.
Working Paper
Why Does the Yield Curve Predict GDP Growth? The Role of Banks
We provide evidence on the effect of the slope of the yield curve on economic activity through bank lending. Using detailed data on banks’ lending activities coupled with term premium shocks identified using high-frequency event study or instrumental variables, we show that a steeper yield curve associated with higher term premiums (rather than higher expected short rates) boosts bank profits and the supply of bank loans. Intuitively, a higher term premium represents greater expected profits on maturity transformation, which is at the core of banks’ business model, and therefore ...
Working Paper
Flights to Safety
Using only daily data on bond and stock returns, we identify and characterize flight to safety (FTS) episodes for 23 countries. On average, FTS days comprise less than 3% of the sample, and bond returns exceed equity returns by 2.5 to 4%. The majority of FTS events are country-specific not global. FTS episodes coincide with increases in the VIX and the Ted spread, decreases in consumer sentiment indicators and appreciations of the Yen, Swiss franc, and US dollar. The financial, basic materials and industrial industries under-perform in FTS episodes, but the telecom industry outperforms. Money ...
Newsletter
Macroeconomic Sources of Recent Interest Rate Fluctuations
The authors use a new statistical method to attribute daily changes in U.S. Treasury yields and inflation compensation to changes in investor beliefs about domestic and foreign growth, inflation, and monetary policy. They find that while foreign developments have been important drivers of U.S. yields and expected inflation over the last decade, the recent divergence between U.S. and European monetary policy has had little effect. Instead, the behavior of asset prices seems consistent with positive ?aggregate supply shocks.? One candidate for such shocks is the large decline in energy prices ...