Finance and Economics Discussion Series (FEDS)
November 2012
The Aggregate Demand Effects of Short- and Long-Term Interest Rates
Abstract:
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.
Full paper (Screen Reader Version)Keywords: IS curve, long-term interest rates
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