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Federal Reserve interest rate targeting, rational expectations, and the term structure

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  • Rudebusch, Glenn D.

Abstract

The amount of information in the yield curve for forecasting future changes in short rates varies with the maturity of the rates involved. Indeed, spreads between certain long and short rates appear unrelated to future changes in the short rate--contrary to the rational expectations hypothesis of the term structure. This paper estimates a daily model of Federal Reserve interest rate targeting behavior, which, accompanied by the maintained hypothesis of rational expectations, explains the varying predictive ability of the yield curve and elucidates the link between Fed policy and the term structure.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 35 (1995)
Issue (Month): 2 (April)
Pages: 245-274

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Handle: RePEc:eee:moneco:v:35:y:1995:i:2:p:245-274

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  2. Glenn D. Rudebusch, 1992. "The uncertain unit root in real GNP," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 193, Board of Governors of the Federal Reserve System (U.S.).
  3. Diebold, Francis X & Rudebusch, Glenn D, 1992. "Have Postwar Economic Fluctuations Been Stabilized?," American Economic Review, American Economic Association, vol. 82(4), pages 993-1005, September.
  4. N. Gregory Mankiw & Jeffrey A. Miron, 1990. "Should The Fed Smooth Interest Rates? The Case of Seasonal Monetary Policy," NBER Working Papers 3388, National Bureau of Economic Research, Inc.
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  6. Kenneth A. Froot, 1987. "New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates," NBER Working Papers 2363, National Bureau of Economic Research, Inc.
  7. Glenn D. Rudebusch, 1990. "Trends and random walks in macroeconomic time series: a re-examination," Working Paper Series / Economic Activity Section 105, Board of Governors of the Federal Reserve System (U.S.).
  8. Michael Dotsey & Christopher Otrok, 1995. "The rational expectations hypothesis of the term structure, monetary policy, and time-varying term premia," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Win, pages 65-81.
  9. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
  10. Stephen R. Blough, 1994. "Yield curve forecasts of inflation: a cautionary tale," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 3-16.
  11. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
  12. Poole, William, 1982. "Federal Reserve Operating Procedures: A Survey and Evaluation of the Historical Record since October 1979," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 14(4), pages 575-96, November.
  13. Bennett T. McCallum, 1994. "Monetary Policy and the Term Structure of Interest Rates," NBER Working Papers 4938, National Bureau of Economic Research, Inc.
  14. Pierluigi Balduzzi & Giuseppe Bertola & Silverio Foresi, 1993. "A Model of Target Changes and the Term Structure of Interest Rates," NBER Working Papers 4347, National Bureau of Economic Research, Inc.
  15. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  16. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper, Federal Reserve Bank of Richmond 90-06, Federal Reserve Bank of Richmond.
  17. Francis X. Diebold & Glenn D. Rudebusch, 1988. "A nonparametric investigation of duration dependence in the American business cycle," Working Paper Series / Economic Activity Section 90, Board of Governors of the Federal Reserve System (U.S.).
  18. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, Elsevier, vol. 24(3), pages 331-351, November.
  19. N. Gregory Mankiw & Jeffrey A. Miron, 1985. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc.
  20. Simon, David P., 1989. "Expectations and Risk in the Treasury Bill Market: An Instrumental Variables Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 357-365, September.
  21. Timothy Cook & Thomas Hahn, 1989. "The credibility of the Wall Street Journal in reporting the timing and details of monetary policy events," Working Paper, Federal Reserve Bank of Richmond 89-05, Federal Reserve Bank of Richmond.
  22. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
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