Finance and Economics Discussion Series: The Aggregate Demand Effects of Short- and Long-Term Interest Rates

I develop empirical models of the U.S. economy that distinguish between the aggregate demand effects of short- and long-term interest rates-one with clear "microfoundations" and one more loosely motivated. These models are estimated using government and private long-term bond yields. Estimation results suggest short- and long-term interest rates both influence aggregate spending. The results indicate that the short-term interest rate has a larger influence on economic activity, through its impact on the entire term structure, than term and risk premiums (for equal-sized movements in long-term interest rates). Potential policy implications are discussed.

• | Author: United States Federal Reserve Board
• | Publisher: Bibliogov
• | Publication Date: Feb 04, 2013
• | Number of Pages: 34 pages
• | Binding: Paperback or Softback
• | ISBN-10: 1288699050
• | ISBN-13: 9781288699056