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Expectations and the Treasury Bill-Federal Funds Rate Spread over Recent Monetary Policy Regimes

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  • Simon, David P
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    Abstract

    This paper shows that the spread between the three-month Treasury bill and the federal funds rate has significant predictive power for the future change in the federal funds rate during the volatile nonborrowed reserves operating regime, but it has less and no predictive power during the borrowed reserves regime and the federal funds targeting regime, respectively. These findings suggest that Treasury bill rates forecast future federal funds rates most accurately when the Federal Reserve follows a well-defined rule that does not smooth the impact of shocks on the federal funds rate. Copyright 1990 by American Finance Association. See http://www.jstor.org for details.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 45 (1990)
    Issue (Month): 2 (June)
    Pages: 467-77

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    Handle: RePEc:bla:jfinan:v:45:y:1990:i:2:p:467-77

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    Cited by:
    1. Thornton, Daniel L., 2006. "Tests of the Expectations Hypothesis: Resolving the Campbell-Shiller Paradox," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 511-542, March.
    2. Guidolin, Massimo & Thornton, Daniel L., 2008. "Predictions of short-term rates and the expectations hypothesis of the term structure of interest rates," Working Paper Series 0977, European Central Bank.
    3. Sarno, Lucio & Thornton, Daniel L, 2002. "The Dynamic Relationship Between the Federal Funds rate and the Treasury Bill Rate: An Empirical Investigation," CEPR Discussion Papers 3225, C.E.P.R. Discussion Papers.
    4. Chris Downing & Stephen Oliner, 2004. "The term structure of commercial paper rates," Finance and Economics Discussion Series 2004-18, Board of Governors of the Federal Reserve System (U.S.).
    5. Amir Kia, 2011. "Developing a Market-Based Monetary Policy Transparency Index: Evidence from the United States," Economic Issues Journal Articles, Economic Issues, vol. 16(2), pages 53-80, September.
    6. Giorgio Valente & Daniel Thornton & Lucio Sarno, 2005. "The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields," Working Papers wp05-13, Warwick Business School, Finance Group.
    7. Daniel L. Thornton, 2004. "Tests of the expectations hypothesis: resolving the anomalies when the short-term rate is the federal funds rate," Working Papers 2000-003, Federal Reserve Bank of St. Louis.
    8. Thomas B. King, 2003. "Discipline and liquidity in the market for federal funds," Supervisory Policy Analysis Working Papers 2003-02, Federal Reserve Bank of St. Louis.

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