Measuring the Effect of the Zero Lower Bound on Medium- and.pdf

FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Measuring the Effect of the Zero Lower Bound On Medium- and Longer-Term Interest Rates Eric T. Swanson Federal Reserve Bank of San Francisco and John C. Williams Federal Reserve Bank of San Francisco January 2013 Working Paper 2012-02 /publications/economics/papers/2012/wp12-02bk.pdf The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates Eric T. Swanson∗ and John C. Williams∗ Federal Reserve Bank of San Francisco January 2013 Abstract The federal funds rate has been at the zero lower bound for over four years, since December 2008. According to many macroeconomic models, this should have greatly reduced the effectiveness of monetary policy and increased the efficacy of fiscal policy. However, standard macroeconomic theory also implies that private-sector decisions depend on the entire path of expected future short- term interest rates, not just the current level of the overnight rate. Thus, interest rates with a year or more to maturity are arguably more relevant for the economy, and it is unclear to what