NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Fed and Interest Rates: A High-Frequency Identification

John H. Cochrane, Monika Piazzesi

NBER Working Paper No. 8839
Issued in March 2002
NBER Program(s):   AP   EFG   ME

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.

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Published: Cochrane, John H. and Monica Piazzesi. "The Fed And Interest Rates - A High-Frequency Identification," American Economic Review, 2002, v92(2,May), 90-91.

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