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Interest Rate Targeting and the Dynamics of Short-Term Rates

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  • Balduzzi, Pierluigi, et al

Abstract

A feature of U.S. monetary policy has been active targeting of overnight fed funds rates. The authors show that, during a period of tight targeting (1989-96), term fed funds spreads from the target displayed pronounced volatility and persistence, which increase with the maturity of the loan. They show that the increase in persistence is consistent with a model of infrequent, but predictable, revisions of the target. In the authors' model, the (autoco-)variance of the spreads of term fed funds rates from the target increases with the maturity because longer-term rates reflect persistent expectations of the next target change. Coauthors are Giuseppe Bertola, Silverio Foresi, and Leora Klapper.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 30 (1998)
Issue (Month): 1 (February)
Pages: 26-50

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Handle: RePEc:mcb:jmoncb:v:30:y:1998:i:1:p:26-50

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  2. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 129-152, Summer.
  3. Campbell, John, 1987. "Money Announcements, The Demand for Bank Reserves, and the Behavior of the Federal Funds Rate within the Statement Week," Scholarly Articles 3220231, Harvard University Department of Economics.
  4. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 211-28, May.
  5. Narasimhan Jegadeesh & George G. Pennacchi, 1996. "The behavior of interest rates implied by the term structure of Eurodollar future," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 426-451.
  6. Barrett, W. Brian & Slovin, Myron B. & Sushka, Marie E., 1988. "Reserve regulation and recourse as a source of risk premia in the federal funds market," Journal of Banking & Finance, Elsevier, vol. 12(4), pages 575-584, December.
  7. Angelo Melino, 1986. "The Term Structure of Interest Rates: Evidence and Theory," NBER Working Papers 1828, National Bureau of Economic Research, Inc.
  8. Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1997. "Economic News and the Yield Curve: Evidence from the U.S. Treasury Market," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-005, New York University, Leonard N. Stern School of Business-.
  9. Mankiw, N Gregory & Miron, Jeffrey A & Weil, David N, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," American Economic Review, American Economic Association, vol. 77(3), pages 358-74, June.
  10. Barro, Robert J., 1989. "Interest-rate targeting," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 3-30, January.
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