Shocking Interest Rate Floors

Canetg, Fabio; Kaufmann, Daniel (May 2019). Shocking Interest Rate Floors (Unpublished) Department of Economics, University of Bern

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We analyze central bank debt as a tool to control money market rates. We show in a theoretical model that the money market rate increases with the volume of, and yield on, central bank debt. Moreover, issuing central bank debt implements an interest rate floor, similar to paying interest on reserves. We then exploit the unique institutional setting of a Swiss debt security program to identify the dynamic causal effects of two orthogonal shocks through heteroscedasticity. The money market rate shock has modest effects on other financial market variables. The expectation shock causes a strong and persistent appreciation of the Swiss franc, a decline in stock prices, a decline in long-term interest rates, and a rise in corporate bond risk premia. The two shocks explain up to 80% of the forecast-error variance in these variables.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics
03 Faculty of Business, Economics and Social Sciences > Department of Economics > Institute of Economics > Macro and National Economics
03 Faculty of Business, Economics and Social Sciences > Department of Economics > Institute of Economics > Economic Policy and Regional Economics
03 Faculty of Business, Economics and Social Sciences > Department of Economics > Institute of Economics > Macroeconomics

UniBE Contributor:

Canetg, Fabio

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

Publisher:

Department of Economics, University of Bern

Language:

English

Submitter:

Dino Collalti

Date Deposited:

28 Jan 2020 14:40

Last Modified:

28 Jan 2020 14:40

BORIS DOI:

10.7892/boris.137099

URI:

https://boris.unibe.ch/id/eprint/137099

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