@timwillems.bsky.social
Here’s the link to our new paper: www.bankofengland.co.uk/working-pape...
It is a heavily revised version of our earlier WP on the topic: www.nber.org/papers/w32511
[7/7]
It is a heavily revised version of our earlier WP on the topic: www.nber.org/papers/w32511
[7/7]
Monetary policy along the yield curve: why can central banks affect long-term real rates?
Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
www.bankofengland.co.uk
February 21, 2025 at 3:51 PM
Here’s the link to our new paper: www.bankofengland.co.uk/working-pape...
It is a heavily revised version of our earlier WP on the topic: www.nber.org/papers/w32511
[7/7]
It is a heavily revised version of our earlier WP on the topic: www.nber.org/papers/w32511
[7/7]
Since the potency of monetary policy is decreasing in the persistence with which it is conducted, FLANK also implies that monetary policy is not the right tool to offset very persistent demand shocks (Forward Guidance can be counterproductive in FLANK) [6/7]
February 21, 2025 at 3:51 PM
Since the potency of monetary policy is decreasing in the persistence with which it is conducted, FLANK also implies that monetary policy is not the right tool to offset very persistent demand shocks (Forward Guidance can be counterproductive in FLANK) [6/7]
FLANK also suggests that r*-estimates of the Laubach-Williams type are biased. In particular they (a) end up partly reflecting the CB’s own prior belief (the aforementioned self-fulfilling aspect) and (b) show excessive co-movement with the policy rate [5/7]
February 21, 2025 at 3:51 PM
FLANK also suggests that r*-estimates of the Laubach-Williams type are biased. In particular they (a) end up partly reflecting the CB’s own prior belief (the aforementioned self-fulfilling aspect) and (b) show excessive co-movement with the policy rate [5/7]
For very persistent rate changes, the net effect is ≈0. Consequently, the v long-term real rate (aka r*) is not firmly pinned down in FLANK. The system becomes very forgiving to a central bank working with a biased view of r*. This gives a central bank's beliefs on r* a self-fulfilling flavor [4/7]
February 21, 2025 at 3:51 PM
For very persistent rate changes, the net effect is ≈0. Consequently, the v long-term real rate (aka r*) is not firmly pinned down in FLANK. The system becomes very forgiving to a central bank working with a biased view of r*. This gives a central bank's beliefs on r* a self-fulfilling flavor [4/7]
While intertemporal substitution and asset valuation work in the conventional direction (r↓ → c↑), the asset demand channel is dissonant: r↓ → negative interest income effect, making households want to save more as r↓ (as each unit of saving now grows less over time) [3/7]
February 21, 2025 at 3:51 PM
While intertemporal substitution and asset valuation work in the conventional direction (r↓ → c↑), the asset demand channel is dissonant: r↓ → negative interest income effect, making households want to save more as r↓ (as each unit of saving now grows less over time) [3/7]
Our paper builds a FLANK (Finitely-Lived Agent New Keynesian) model, featuring 3 channels via which interest rates affect consumption: intertemporal substitution, asset valuation, and asset demand (driven by a need to save for retirement) [2/7]
February 21, 2025 at 3:51 PM
Our paper builds a FLANK (Finitely-Lived Agent New Keynesian) model, featuring 3 channels via which interest rates affect consumption: intertemporal substitution, asset valuation, and asset demand (driven by a need to save for retirement) [2/7]