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What's unique about the federal funds rate? evidence from a spectral perspective

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  • Lucio Sarno
  • Daniel L. Thornton
  • Yi Wen

Abstract

A large empirical literature attempts to identify US monetary policy shocks using the effective federal funds rate. This paper compares the time series behavior of the effective federal funds rate to 10 US interest rates with maturities ranging form overnight to 10 years. Using a spectral estimation procedure that is particularly suitable and novel in the context, we identify idiosyncratic shocks to the federal funds rate and provide evidence on their impact on other US interest rates at various frequencies. Our results suggest that, while all of the interest rates examined have common shocks at low frequency, the federal funds rate contains some unique information at high frequency, although this information appears to be relevant only at the short end of the term structure of interest rates. In turn, these results are open to various alternative interpretations.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2002-029.

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Date of creation: 2002
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Handle: RePEc:fip:fedlwp:2002-029

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Keywords: Federal funds rate ; Interest rates;

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  1. James D. Hamilton, 1996. "Measuring the liquidity effect," Working Papers in Applied Economic Theory 96-06, Federal Reserve Bank of San Francisco.
  2. Daniel L. Thornton, 1998. "The Federal Reserve's operating procedure, nonborrowed reserves, borrowed reserves and the liquidity effect," Working Papers 1998-009, Federal Reserve Bank of St. Louis.
  3. Marvin Goodfriend, 1987. "Interest rate smoothing and price level trend-stationarity," Working Paper 87-03, Federal Reserve Bank of Richmond.
  4. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  5. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
  6. Lawrence J. Christiano & Martin Eichenbaum, 1991. "Identification and the Liquidity Effect of a Monetary Policy Shock," NBER Working Papers 3920, National Bureau of Economic Research, Inc.
  7. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  8. Hamilton, James D., 1998. "The supply and demand for Federal Reserve deposits," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 1-44, December.
  9. Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 489-516, October.
  10. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper 90-06, Federal Reserve Bank of Richmond.
  11. John B. Taylor, 2001. "Expectations, open market operations, and changes in the federal funds rate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 33-58.
  12. Barro, Robert J., 1989. "Interest-rate targeting," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 3-30, January.
  13. Richard Clarida, 2001. "The Empirics of Monetary Policy Rules in Open Economies," NBER Working Papers 8603, National Bureau of Economic Research, Inc.
  14. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring monetary policy," Working Papers in Applied Economic Theory 95-09, Federal Reserve Bank of San Francisco.
  15. Thomas M. Humphrey, 1983. "Can the central bank peg real interest rates? : a survey of classical and neoclassical opinion," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 12-21.
  16. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  17. Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 53-111, December.
  18. Feinman, Joshua N, 1993. "Estimating the Open Market Desk's Daily Reaction Function," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 231-47, May.
  19. Wen, Yi, 2001. "A generalized method of impulse identification," Economics Letters, Elsevier, vol. 73(3), pages 367-374, December.
  20. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1994. "Identification and the effects of monetary policy shocks," Working Paper Series, Macroeconomic Issues 94-7, Federal Reserve Bank of Chicago.
  21. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
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Cited by:
  1. Marco Lippi & Daniel L. Thornton, 2004. "A Dynamic Factor Analysis of the Response of U.S. Interest Rates to News," LEM Papers Series 2004/05, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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