December 2014 issue contents
The Aggregate Demand Effects of Short- and Long-Term Interest Rates

by Michael T. Kileya


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 that both short- and long-term interest rates 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.

JEL Codes: E43, E44, E50.

Full article (PDF, 36 pages, 522 kb)

a Federal Reserve Board