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Keywords:Interest rates 

Working Paper
Macroeconomic implications of changes in the term premium

Linearized New Keynesian models and empirical no-arbitrage macro-finance models offer little insight regarding the implications of changes in bond term premiums for economic activity. We investigate these implications using both a structural model and a reduced-form framework. We show that there is no structural relationship running from the term premium to economic activity, but a reduced-form empirical analysis does suggest that a decline in the term premium has typically been associated with stimulus to real economic activity, which contradicts earlier results in the literature.
Working Paper Series , Paper 2006-46

Working Paper
The liquidity premium in average interest rates

This paper studies recent models of the liquidity effect of money on interest rates to determine if a systematic relationship between liquidity shocks and the economy could affect the average real interest rate.
International Finance Discussion Papers , Paper 432

Working Paper
A black swan in the money market

At the center of the financial market crisis of 2007-2008 was a highly unusual jump in spreads between the overnight inter-bank lending rate and term London inter-bank offer rates (Libor). Because many private loans are linked to Libor rates, the sharp increase in these spreads raised the cost of borrowing and interfered with monetary policy. The widening spreads became a major focus of the Federal Reserve, which took several actions--including the introduction of a new term auction facility (TAF)--to reduce them. This paper documents these developments and, using a no-arbitrage model of the ...
Working Paper Series , Paper 2008-04

Working Paper
Real interest rates during the disinflation process in developing countries

This paper addresses a phenomenon often noted in association with programs aimed at stabilizing high rates of inflation: a rise in the ex post real interest rate following implementation of the disinflation strategy. Such increases have been observed in connection with the stopping of European hyperinflations in the 1920s, as well as during the more recent experiences of disinflation in Argentina and Israel. To better understand this behavior, we develop a very general model of interest rate determination in a small open economy with two goods--traded and non-traded--and three assets--money, ...
International Finance Discussion Papers , Paper 331

Journal Article
Explaining financial market facts: the importance of incomplete markets and transaction costs

In this article, I suggest that incomplete markets and transaction costs are crucial for explaining the high equity premium and the low risk-free rate. I first demonstrate the failure of the complete frictionless markets model in explaining these return puzzles and then show how introducing incomplete markets and transaction costs can lead to success. Additionally, I explain how these features lead to predictions concerning individual consumptions, wealths, portfolios, and asset market transactions that are in better agreement with the facts than the predictions of the complete frictionless ...
Quarterly Review , Volume 17 , Issue Win , Pages 17-31

Working Paper
The impact of monetary policy on exchange rates during financial crises

This paper addresses the impact of monetary policy on exchange rates during financial crises. Some observers have argued that a tightening of monetary policy is necessary to stabilize the exchange rate, restore confidence, and lay the groundwork for an eventual recovery of economic activity. Others have argued that by raising interest rates (which reduces the ability of borrowers to repay loans and thereby weakens the banking system), tightening may further reduce investor confidence and lead to further weakening--not strengthening--of domestic currencies. ; This debate, which became highly ...
International Finance Discussion Papers , Paper 669

Journal Article
Measuring the Stance of Monetary Policy on and off the Zero Lower Bound

Taeyoung Doh and Jason Choi propose a new ?shadow? short-term interest rate to measure the stance of policy when the federal funds rate was constrained by the zero lower bound.
Economic Review , Issue Q III , Pages 5-24

Working Paper
Shifting endpoints in the term structure of interest rates

This paper links the term structure to perceptions of monetary policy. Long-horizon forecasts of short rates needed in empirical term structure models are heavily influenced by the endpoints, or limiting conditional forecasts, of the short rate process. Mean-reversion or unit roots are commonly assumed, but do not provide realistic yield predictions. Failures occur because neither accounts for historical shifts in market perceptions of the policy target for inflation. This paper links endpoint shifts to a learning model where agents must detect shifts in long-term policy goals. With ...
Research Working Paper , Paper 97-08

Discussion Paper
The behavior of short-term interest rates in a rational banking model

Special Studies Papers , Paper 219

Journal Article
The tax effect, and the recent behaviours of the after-tax real rate : is it too high?

Concerns that interest rates are too high have been prevalent throughout the 1980s. Even after adjusting for expected inflation, many people argue that real interest rates are inordinately high by historical standards. Yash Mehra, in his article The Tax Effect and the Recent Behaviour of the After-Tax Real Rate: Is It Too High?, points out that because interest income is taxed, business decisions are based on the after-tax real rate and public concern should focus on this measure of interest rates. Mehra adds to the accumulating evidence that changes in taxes on interest income alter the ...
Economic Review , Volume 70 , Issue Jul , Pages 8-20

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