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A dynamic factor analysis of the response of U. S. interest rates to news

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  • Marco Lippi
  • Daniel L. Thornton

Abstract

This paper uses a dynamic factor model recently studied by Forni, Hallin, Lippi and Reichlin (2000) and Forni, Giannone, Lippi and Reichlin (2004) to analyze the response of 21 U.S. interest rates to news. Using daily data, we find that the news that affects interest rates daily can be summarized by two common factors. This finding is robust to both the sample period and time aggregation. Each rate has an important idiosyncratic component; however, the relative importance of the idiosyncratic component declines as the frequency of the observations is reduced, and nearly vanishes when rates are observed at the monthly frequency. Using an identification scheme that allows for the fact that when policy actions are unknown to the market the funds rate should respond first to policy actions, we are unable to identify a unique effect of monetary policy in the funds rate at the daily frequency.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2004-013.

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Date of creation: 2004
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Handle: RePEc:fip:fedlwp:2004-013

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Keywords: Interest rates;

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References

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  1. Mario Forni & Domenico Giannone & Marco Lippi & Lucrezia Reichlin, 2007. "Opening the Black Box: Structural Factor Models with Large Cross-Sections," Center for Economic Research (RECent) 008, University of Modena and Reggio E., Dept. of Economics.
  2. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
  3. Duffee, Gregory R, 1996. " Idiosyncratic Variation of Treasury Bill Yields," Journal of Finance, American Finance Association, vol. 51(2), pages 527-51, June.
  4. Lucio Sarno & Daniel L. Thornton & Giorgio Valente, 2004. "Federal funds rate prediction," Working Papers 2002-005, Federal Reserve Bank of St. Louis.
  5. Forni, Mario & Lippi, Marco, 2000. "The Generalized Dynamic Factor Model: Representation Theory," CEPR Discussion Papers 2509, C.E.P.R. Discussion Papers.
  6. Daniel L. Thornton, 2001. "Identifying the liquidity effect at the daily frequency," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 59-82.
  7. Hamilton, James D, 1997. "Measuring the Liquidity Effect," American Economic Review, American Economic Association, vol. 87(1), pages 80-97, March.
  8. 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.
  9. Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
  10. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  11. Garfinkel, Michelle R & Thornton, Daniel L, 1995. "The Information Content of the Federal Funds Rate: Is It Unique?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 838-47, August.
  12. Lucio Sarno & Daniel L. Thornton, 2004. "The efficient market hypothesis and identification in structural VARs," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 49-60.
  13. Lucio Sarno & Daniel L. Thornton & Yi Wen, 2002. "What's unique about the federal funds rate? evidence from a spectral perspective," Working Papers 2002-029, Federal Reserve Bank of St. Louis.
  14. Forni, Mario & Lippi, Marco & Reichlin, Lucrezia, 2003. "Opening the Black Box: Structural Factor Models versus Structural VARs," CEPR Discussion Papers 4133, C.E.P.R. Discussion Papers.
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Cited by:
  1. Moneta, Fabio & Rüffer, Rasmus, 2006. "Business cycle synchronisation in East Asia," Working Paper Series 0671, European Central Bank.

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