The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission

As monetary policy tools exert increasing impacts on the longer end of the yield curve, this paper considers a long-term real rate as an alternative policy indicator in a structural VAR framework. Based on an event study of FOMC announcements, we advance a measure of the unexpected policy influence on long-term interest rate volatility. Monetary policy shocks identified by this volatility measure as an external instrument drive significant swings in credit market sentiments and real output, while the policy shocks motivated by unexpected policy rate changes lead to muted responses. Our results support the validity of the risk-taking channel, in which risk perception in financial markets plays an indispensable role in monetary policy transmission.