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American Economic Review Vol. 104 No. 10 2014

Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates

Eric T. Swanson1; John C. Williams2

1 Department of Economics, University of California, Irvine, 3151 Social Science Plaza, Irvine, CA 92697-5100 (e-mail: ) · 2 Federal Reserve Bank of San Francisco, 101 Market St., San Francisco, CA 94105 (e-mail: ).

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.

DOI
10.1257/aer.104.10.3154
Volume
104
Issue
10
Pages
3154-3185
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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