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The Equilibrium Fed Funds Rate and the Indicator Properties of Term-Structure Spreads

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  • Bomfim, Antulio N
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    Abstract

    This paper introduces a model-based measure of the equilibrium federal funds rate and examines the indicator properties of the spread between observed and equilibrium rates. The results are compared to those of existing studies, which implicitly use long-term interest rates to proxy the equilibrium funds rate. Granger-causality tests suggest that different measures of the term-structure spread are dominated by the funds-rate spread as a forecaster of a wide range of macroeconomic variables. These results are supported by variance-decomposition analysis. The paper also estimates simple VARs to discuss how the policy stance responds to macroeconomic shocks. Copyright 1997 by Oxford University Press.

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    Bibliographic Info

    Article provided by Western Economic Association International in its journal Economic Inquiry.

    Volume (Year): 35 (1997)
    Issue (Month): 4 (October)
    Pages: 830-46

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    Handle: RePEc:oup:ecinqu:v:35:y:1997:i:4:p:830-46

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    Cited by:
    1. Todd E. Clark & Sharon Kozicki, 2004. "Estimating equilibrium real interest rates in real time," Research Working Paper RWP 04-08, Federal Reserve Bank of Kansas City.
    2. Christian Bustamante & Luis E. Rojas, 2012. "Constant-Interest-Rate Projections and Its Indicator Properties," Borradores de Economia 696, Banco de la Republica de Colombia.
    3. repec:onb:oenbwp:y::i:84:b:1 is not listed on IDEAS
    4. Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Empirica, Springer, vol. 31(2), pages 185-204, June.
    5. Gebhardt Kirschgässner & Marcel Savioz, 2001. "Monetary Policy and Forecasts for Real GDP Growth: An Empirical Investigation for the Federal Republic of Germany," German Economic Review, Verein für Socialpolitik, vol. 2(4), pages 339-365, November.
    6. Athanasios Orphanides & John C. Williams, 2002. "Robust monetary policy rules with unknown natural rates," Working Paper Series 2003-01, Federal Reserve Bank of San Francisco.
    7. Roberto Perrelli & Shaun K. Roache, 2014. "Time-Varying Neutral Interest Rate—The Case of Brazil," IMF Working Papers 14/84, International Monetary Fund.
    8. Ray C. Fair, 2005. "Natural Concepts in Macroeconomics," Cowles Foundation Discussion Papers 1525, Cowles Foundation for Research in Economics, Yale University.
    9. Olmos, Lorena & Sanso Frago, Marcos, 2014. "Natural Rate of Interest with Endogenous Growth, Financial Frictions and Trend Inflation," MPRA Paper 57212, University Library of Munich, Germany.
    10. John P. Judd & Glenn D. Rudebusch, 1998. "Taylor's rule and the Fed, 1970-1997," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
    11. Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Economic Change and Restructuring, Springer, vol. 31(2), pages 185-204, June.
    12. Jean-Paul Lam, 2004. "Estimating Policy-Neutral Interest Rates for Canada Using a Dynamic Stochastic General-Equilibrium Framework," Working Papers 04-9, Bank of Canada.
    13. Antulio N. Bomfim, 2001. "Measuring equilibrium real interest rates: what can we learn from yields on indexed bonds?," Finance and Economics Discussion Series 2001-53, Board of Governors of the Federal Reserve System (U.S.).
    14. repec:cml:incocp:1-06 is not listed on IDEAS
    15. Jesus Crespo-Cuaremsa & Ernest Gnan & Doris Ritzberger-Gruenwald, 2003. "Searching for the natural rate of interest: a euro area perspective," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 60-80 Bank for International Settlements.
    16. John C. Williams, 2003. "The natural rate of interest," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct31.

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