Board of Governors of the Federal Reserve System

January 2014

Monetary Policy and Real Borrowing Costs at the Zero Lower Bound

Simon Gilchrist, David Lopez-Salido, and Egon Zakrajsek

Abstract:

This paper compares the effects of conventional monetary policy on real borrowing costs with those of the unconventional measures employed after the target federal funds rate hit the zero lower bound (ZLB). For the ZLB period, we identify two policy surprises: changes in the 2-year Treasury yield around policy announcements and changes in the 10-year Treasury yield that are orthogonal to those in the 2-year yield. The efficacy of unconventional policy in lowering real borrowing costs is comparable to that of conventional policy, in that it implies a complete pass-through of policy-induced movements in Treasury yields to comparable-maturity private yields.

Keywords: Unconventional monetary policy; LSAPs; forward guidance, term premia, corporate bond yields, mortgage interest rates

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