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Interest-rate causality between the federal funds rate and long-run market interest rates

Author

Listed:
  • Hongkil Kim

    (Department of Economics, University of North Carolina Asheville, NC, USA)

Abstract

This paper investigates empirical relations between the federal funds rate/federal funds future rate and long-run market interest rates, employing a cointegration technique, vector error-correction modeling, and the Granger causality test developed by Toda and Yamamoto (1995). As a result, stable long-run relationships between the federal funds rate and Treasury bond rates are identified in the form of bidirectional causalities that are supportive of the Structuralist position, while the findings indicate unidirectional causalities from the federal funds rate to the Treasury bond rates in the short run. Empirical evidence in this paper also rejects the Horizontalist view that the expected future federal funds rate is relevant to current movements of the long-run interest rates, demonstrating Moore (1991) and his followers' reverse interpretation on the causality from market rates to the federal funds rate to be inaccurate. An implication of such findings is that the current and the expected future federal funds rate do not have as much exogenous power on long-run market rates as claimed by Horizontalists, and the federal funds rate is, rather, endogenous to market rates for the 2004:2–2008:8 period.

Suggested Citation

  • Hongkil Kim, 2019. "Interest-rate causality between the federal funds rate and long-run market interest rates," Review of Keynesian Economics, Edward Elgar Publishing, vol. 7(3), pages 388-401, July.
    • Handle: RePEc:elg:rokejn:v:7:y:2019:i:3:p388-401
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    More about this item

    Keywords

    endogenous money; Horizontalists; Structuralists; contegration; VECM; Granger causality;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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