Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates
American Economic Review
vol. 104,
no. 10, October 2014
(pp. 3154-85)
Abstract
According to standard macroeconomic models, the zero lower bound greatly reduces the effectiveness of monetary policy and increases the efficacy of fiscal policy. However, private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current short-term rate. Put differently, longer-term yields matter. We show how to measure the zero bound's effects on yields of any maturity. Indeed, 1- and 2-year Treasury yields were surprisingly unconstrained throughout 2008 to 2010, suggesting that monetary and fiscal policy were about as effective as usual during this period. Only beginning in late 2011 did these yields become more constrained.Citation
Swanson, Eric T., and John C. Williams. 2014. "Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates." American Economic Review, 104 (10): 3154-85. DOI: 10.1257/aer.104.10.3154Additional Materials
JEL Classification
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
- E62 Fiscal Policy