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Monetary policy and the secular decline in long-term interest rates: A global perspective

Author

Listed:
  • Boris Hofmann
  • Zehao Li
  • Steve Pak Yeung Wu

Abstract

We demonstrate that almost 70% of the secular decline in long-term interest rates across advanced economies between the early 1990s and 2023 occurred in the three days surrounding U.S. monetary policy announcements (FOMC windows). By contrast, other central banks' announcements had only limited effects, if any, on the long-run direction of long-term interest rates, both domestically and across countries. The persistent global effect of the FOMC window reflects the combination of the concentration of declines in U.S. bond yields in this window and large interest rate spillovers from the U.S. to other countries. We further find that the decline in interest rates during FOMC windows is closely associated with pure monetary policy shocks and not with information effects. Moreover, the rate decline on FOMC announcement days is primarily driven by changes in real and expected short rates rather than inflation expectations and term premia. These findings highlight the pivotal role of U.S. monetary policy news in shaping global long-term interest rate dynamics.

Suggested Citation

  • Boris Hofmann & Zehao Li & Steve Pak Yeung Wu, 2025. "Monetary policy and the secular decline in long-term interest rates: A global perspective," BIS Working Papers 1252, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:1252
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    References listed on IDEAS

    as
    1. Josef Platzer & Marcel Peruffo, 2022. "Secular Drivers of the Natural Rate of Interest in the United States: A Quantitative Evaluation," IMF Working Papers 2022/030, International Monetary Fund.
    2. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    3. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    4. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
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    More about this item

    Keywords

    monetary policy; bond yields; interest rate trends; global financial cycle;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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