CAN MONETARY POLICY INFLUENCE LONG-TERM INTEREST RATES? IT DEPENDS

Authors

  • DAVID BECKWORTH,

    1. Beckworth: Assistant Professor, Department of Finance and Economics, Texas State University-San Marcos, San Marcos, TX 78666. Phone 512-245-6067, Fax 512-245-3089, E-mail db52@txstate.edu
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  • KENNETH P. MOON,

    1. Moon: Associate Professor, Department of Finance and Economics, Texas State University-San Marcos, San Marcos, TX 78666. Phone 512-245-6659, Fax 512-245-3089, E-mail kmoon@txstate.edu
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  • J. HOLLAND TOLES

    1. Toles: Senior Lecturer, Department of Finance and Economics, Texas State University-San Marcos, San Marcos, TX 78666. Phone 512-245-3242, Fax 512-245-3089, E-mail ht04@txstate.edu
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    • We would like to acknowledge the editor, two referees, and Josh Hendrickson for helpful comments. All remaining errors are our own.


Abstract

Can monetary policy influence long-term interest rates? Studies that have tackled this question using vector autoregressions (VARs) generally find that monetary policy's influence on long-term interest rates is small and often statistically insignificant. Other studies, however, using a single-equation approach, have found a robust relationship. Our study sheds new light on this question by estimating the effect of monetary policy shocks on long-term interest rates in a VAR with long-run monetary neutrality restrictions. We find that U.S. monetary policy can strongly influence long-term interest rates, but only when the Federal Reserve has inflation-fighting credibility and is able to firmly anchor inflationary expectations. (JEL E43, E51, E52)

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