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The Term Structure with Semi-credible Targeting

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Author Info

  • Heber Farnsworth

    (Washington University in St. Louis)

  • Richard Bass

    (University of Connecticut)

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    Abstract

    The Federal Reserve sets targets for interest rates which it enforces through direct market intervention. These targets are changed periodically. In this paper, we develop a term structure model in which the short rate is subject to a control which keeps it close to a target which changes from time to time. The probability of target changes is not constant in the model, but changes as a function of observables. The model performs well at explaining the shifts in the yield curve that accompany target changes. Copyright (c) 2003 by the American Finance Association.

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    Bibliographic Info

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

    Volume (Year): 58 (2003)
    Issue (Month): 2 (04)
    Pages: 839-866

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    Handle: RePEc:bla:jfinan:v:58:y:2003:i:2:p:839-866

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    Cited by:
    1. Fan, Longzhen & Johansson, Anders C., 2009. "China'S Official Rates And Bond Yields," Working Paper Series 2009-3, China Economic Research Center, Stockholm School of Economics.
    2. Fan, Longzhen & Johansson, Anders C., 2009. "What Moves Bond Yields In China?," Working Paper Series 2009-9, China Economic Research Center, Stockholm School of Economics.

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