Monetary Policy Along the Yield Curve: Why Can Central Banks Affect Long-Term Real Rates?
Real interest rates are widely considered to be driven by real forces over time, with monetary policy having only short-lived effects. We present theory and evidence suggesting instead that monetary policy may (unintentionally) contribute to low-frequency dynamics in real rates. We first show how temporary demand shocks generate persistent movements in forward real rates and r* -estimates. We then demonstrate how such “real rate hysteresis” emerges if the central bank overestimates the sensitivity of aggregate demand to permanent real-rate changes when inferring r*. Such overestimation can arise if the central bank insufficiently incorporates life-cycle forces in its model of r*.
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Copy CitationPaul Beaudry, Paolo Cavallino, and Tim Willems, "Monetary Policy Along the Yield Curve: Why Can Central Banks Affect Long-Term Real Rates?," NBER Working Paper 32511 (2024), https://doi.org/10.3386/w32511.Download Citation
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