The Fed and Interest Rates—A High-Frequency Identification

John H. Cochrane; Monika Piazzesi

doi:10.1257/000282802320189069

American Economic Review Vol. 92 No. 2 2002

The Fed and Interest Rates—A High-Frequency Identification

John H. Cochrane¹; Monika Piazzesi²

¹ Graduate School of Business, University of Chicago, 1101 E. 58th St., Chicago, IL 60637, and NBER. · ² Anderson Graduate School of Management, 110 Westwood Plaza, Los Angeles, CA 90095, and NBER.

Abstract

We measure monetary policy shocks as changes in the Fed funds target rate that surprise bond markets in daily data. These shock series avoid the omitted variable, time-varying parameter, and orthogonalization problem of monthly VARs, and do not impose the expectations hypothesis. We find surprisingly large and persistent responses of bond yields to these shocks. 10 year rates rise as much as 8/10 of a percent to a one percent target shock. The usual view that monetary policy only temporarily raises long term rates and influences inflation would lead one to predict a negative long rate response.

DOI: 10.1257/000282802320189069
Volume: 92
Issue: 2
Pages: 90-95
Language: en
Sources: bibtex:phds-export.bib openalex crossref

The Fed and Interest Rates—A High-Frequency Identification

Abstract

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