Why are Long Rates Sensitive to Monetary Policy?

Ellingsen, Tore; Söderström, Ulf

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Why are Long Rates Sensitive to Monetary Policy?

35 Pages Posted: 25 May 2004

See all articles by Tore Ellingsen

Tore Ellingsen

Stockholm School of Economics - Department of Economics; Norwegian School of Economics (NHH) - Department of Economics

Ulf Söderström

Central Bank of Sweden - Research Department

There are 2 versions of this paper

Date Written: April 2004

Abstract

We use a quantitative model of the US economy to analyse the response of long-term interest rates to monetary policy, and compare the model results with empirical evidence. We find that the model can explain the strong and time-varying yield curve response to monetary policy innovations found in the data. A key ingredient in explaining the yield curve response is central bank private information about the state of the economy or about its own target for inflation.

Keywords: Term structure of interest rates, yield curve, central bank private information, excess sensitivity

JEL Classification: E43, E52

Suggested Citation: Suggested Citation

Ellingsen, Tore and Söderström, Ulf, Why are Long Rates Sensitive to Monetary Policy? (April 2004). Available at SSRN: https://ssrn.com/abstract=548246