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Interest Rate Targeting and the Dynamics of Short-Term Rates

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  • Pierluigi Balduzzi
  • Giuseppe Bertola
  • Silverio Foresi
  • Leora Klapper

Abstract

We find that in 1989-1996, when U.S. monetary policy tightly targeted overnight fed funds rates, the volatility and persistence of spreads between target and term fed funds levels were larger for longer-maturity loans. We show that such patterns are consistent with an expectational model where target revisions are infrequent and predictable. In our model, the (autoco-) variance of the spreads of term fed funds rates from the target increases with maturity because longer-term rates are more heavily influenced by persistent expectations of future target changes.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5944.

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Date of creation: Feb 1997
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Publication status: published as Journal of Money Credit and Banking, Vol. 30, issue 1 (February 1998) pp. 26-50
Handle: RePEc:nbr:nberwo:5944

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  1. Jegadeesh, Narasimhan & Pennacchi, George G, 1996. "The Behavior of Interest Rates Implied by the Term Structure of Eurodollar Futures," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 426-46, August.
  2. 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.
  3. Angelo Melino, 1986. "The Term Structure of Interest Rates: Evidence and Theory," NBER Working Papers 1828, National Bureau of Economic Research, Inc.
  4. Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1996. "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 96-13, New York University, Leonard N. Stern School of Business-.
  5. Campbell, John, 1995. "Some Lessons from the Yield Curve," Scholarly Articles 3163264, Harvard University Department of Economics.
  6. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  7. 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.
  8. 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.
  9. 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.
  10. Barro, Robert J., 1989. "Interest-rate targeting," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 3-30, January.
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