Interest rate pass†through: Divisia user costs of monetary assets and the federal funds rate

Evidence of substantial pass†through in short†term rates and other rates of financial and monetary assets has been typically rejected by the data. This paper investigates level and volatility transmissions among the federal funds rate and the user cost of various monetary assets, which include both instruments of public debt (e.g., t†bills) and private debt (e.g., commercial paper). Results suggest substantial and time†varying pass†through. Higher degrees of bidirectional pass†through occur between the federal funds rate to the user costs of more liquid assets—both in levels and volatilities. Federal funds rate spillovers propagate faster onto more liquid rates as well. These findings have important implications for monetary transmission not only across the term structure but along markets of varying liquidity.