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Discussion Paper
The Sensitivity of Long-Term Interest Rates: A Tale of Two Frequencies
Lucca, David O.; Wright, Jonathan H.; Hanson, Samuel (2019-03-04)
The sensitivity of long-term interest rates to short-term interest rates is a central feature of the yield curve. This post, which draws on our Staff Report, shows that long- and short-term rates co-move to a surprising extent at high frequencies (over daily or monthly periods). However, since 2000, they co-move far less at lower frequencies (over six months or a year). We discuss potential explanations for this finding and its implications for the transmission of monetary policy.
Liberty Street Economics , Paper 20190304

Report
DSGE forecasts of the lost recovery
Cai, Michael; Del Negro, Marco; Giannoni, Marc; Gupta, Abhi; Li, Pearl; Moszkowski, Erica (2018-03-01)
The years following the Great Recession were challenging for forecasters. Unlike other deep downturns, this recession was not followed by a swift recovery, but generated a sizable and persistent output gap that was not accompanied by deflation as a traditional Phillips curve relationship would have predicted. Moreover, the zero lower bound and unconventional monetary policy generated an unprecedented policy environment. We document the real real-time forecasting performance of the New York Fed dynamic stochastic general equilibrium (DSGE) model during this period and explain the results using ...
Staff Reports , Paper 844

Report
A model of the federal funds market: yesterday, today, and tomorrow
Afonso, Gara M.; Lester, Benjamin; Armenter, Roc (2018-02-01)
The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Reserve introduced new tools to implement the target range for the federal funds rate, changing this landscape even more. In this paper, we develop a model that is capable of reproducing the main features of the federal funds market, as observed before ...
Staff Reports , Paper 840

Report
How to escape a liquidity trap with interest rate rules
Duarte, Fernando M. (2016-02-01)
I study how central banks should communicate monetary policy in liquidity trap scenarios in which the zero lower bound on nominal interest rates is binding. Using a standard New Keynesian model, I argue that the key to anchoring expectations and preventing self-fulfilling deflationary spirals is to promise to keep nominal interest rates pegged at zero for a length of time that depends on the state of the economy. I derive necessary and sufficient conditions for this type of state-contingent forward guidance to implement the welfare-maximizing equilibrium as a globally determinate (that is, ...
Staff Reports , Paper 776

Report
The execution of monetary policy: a tale of two central banks
Bartolini, Leonardo; Prati, Alessandro (2003)
The Eurosystem and the U.S. Federal Reserve System follow quite different approaches to the execution of monetary policy. The former institution adopts a "hands-off" approach that largely delegates to depository institutions the task of stabilizing their own liquidity at high frequency. The latter institution follows a much more "hands-on" approach involving daily intervention to fine-tune the liquidity of the banking system. We review the implications of these contrasting approaches, focusing on their impact on the high-frequency behavior of very short-term interest rates. We also examine ...
Staff Reports , Paper 165

Report
Cross-country differences in monetary policy execution and money market rates' volatility
Bartolini, Leonardo; Prati, Alessandro (2003-10-01)
The volatility patterns of overnight interest rates differ across industrial countries in ways that existing models, designed to replicate the features of the U.S. federal funds market, cannot explain. This paper presents an equilibrium model of the overnight interbank market that matches these different patterns by incorporating differences in policy execution by the world's main central banks, including differences in central banks' management of marginal lending and deposit facilities in response to shocks. Our model is consistent with central banks' observed practice of rationing access ...
Staff Reports , Paper 175

Report
Decomposing real and nominal yield curves
Abrahams, Michael; Adrian, Tobias; Crump, Richard K.; Moench, Emanuel (2012)
We present an affine term structure model for the joint pricing of Treasury Inflation-Protected Securities (TIPS) and Treasury yield curves that adjusts for TIPS? relative illiquidity. Our estimation using linear regressions is computationally very fast and can accommodate unspanned factors. The baseline specification with six principal components extracted from Treasury and TIPS yields, in combination with a liquidity factor, generates negligibly small pricing errors for both real and nominal yields. Model-implied expected inflation provides a better prediction of actual inflation than ...
Staff Reports , Paper 570

Report
Term Structures of Inflation Expectations and Real Interest Rates: The Effects of Unconventional Monetary Policy
Aruoba, S. Boragan (2014-08-13)
Inflation expectations have recently received increased interest because of the uncertainty created by the Federal Reserve?s unprecedented reaction to the Great Recession. The effect of this reaction on the real economy is also an important topic. In this paper I use various surveys to produce a term structure of inflation expectations ? inflation expectations at any horizon from 3 to 120 months ? and an associated term structure of real interest rates. Inflation expectations extracted from this model track actual (ex-post) realizations of inflation quite well, and in terms of forecast ...
Staff Report , Paper 502

Working Paper
Optimal Monetary Policy under Negative Interest Rate
Dong, Feng; Wen, Yi (2017-05-16)
In responding to the extremely weak global economy after the financial crisis in 2008, many industrial nations have been considering or have already implemented negative nominal interest rate policy. This situation raises two important questions for monetary theories: (i) Given the widely held doctrine of the zero lower bound on nominal interest rate, how is a negative interest rate (NIR) policy possible? (ii) Will NIR be effective in stimulating aggregate demand? (iii) Are there any new theoretical issues emerging under NIR policies? This article builds a model to show that (i) money ...
Working Papers , Paper 2017-19

Working Paper
The stimulative effect of forward guidance
Gavin, William T.; Keen, Benjamin D.; Richter, Alexander W.; Throckmorton, Nathaniel A. (2013)
This paper examines the stimulative effect of central bank forward guidance?the promise to keep future policy rates lower than its policy rule suggests?when the short-term nominal interest rate is stuck at its zero lower bound (ZLB).We utilize a standard New Keynesian model in which forward guidance enters our model as news shocks to the monetary policy rule. Three key findings emerge: (1) Forward guidance is more stimulative at the ZLB when households believe the economic recovery will be strong. When households expect a weak recovery or initially have low confidence in the economy, forward ...
Working Papers , Paper 2013-38

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