BU Economics Professor Simon Gilchrist’s research was recently featured in the WSJ.
In a new working paper… from the Fed, three economists examined two-year Treasury yields on days the central bank announced policy changes and related effects on 10-year Treasury yields, a benchmark for mortgage rates and other loans, as well as corporate bonds and mortgage-backed securities.
Their conclusion: “unconventional policy — through a combination of forward guidance and asset purchases — is very effective in influencing longer-term interest rates,” and “the effects of both types of monetary policy actions are transmitted fully to real business borrowing costs.”
The two types of policy work in different ways, they wrote, but “we find no meaningful difference in the efficacy of conventional and unconventional policy measures, as measured by the impact of monetary policy on real borrowing costs.”
The abstract of the paper, Monetary Policy and Real Borrowing Costs at the Zero Lower Bound (joint with David López-Salido and Egon Zakrajšek), is below
This paper compares the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB). For the ZLB period, we identify two policy surprises: changes in the 2-year Treasury yield around policy announcements and changes in the 10-year Treasury yield that are orthogonal to those in the 2-year yield. The efficacy of unconventional policy in lowering real borrowing costs is comparable to that of conventional policy, in that it implies a complete pass-through of policy-induced movements in Treasury yields to comparable-maturity private yields.
See the complete article at http://blogs.wsj.com/economics/2014/01/16/feds-new-tools-also-work-by-adjusting-rates/.
Fed’s New Tools Also Work by Adjusting Rates, by Ben Leubsdorf
Published by The Wall Street Journal, 01/16/14.