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What's Unique About the Federal Funds Rate? Evidence from a Spectral Perspective

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  • Lucio Sarno
  • Daniel Thornton
  • Yi Wen

Abstract

This paper compares the behaviour of the effective federal funds rate to 10 US interest rates with maturities ranging from overnight to 10 years. Using spectral estimation methods, we identified idiosyncratic shocks to the funds rate and provided evidence on their impact on other rates at various frequencies. Our results suggest that, while all of the interest rates examined have common shocks at low frequencies, 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. In turn, these results are open to various alternative interpretations. Copyright Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2007.

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Paper provided by Warwick Business School, Finance Group in its series Working Papers with number wpn02-01.

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Date of creation: 2002
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Handle: RePEc:wbs:wpaper:wpn02-01

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  1. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
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  12. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
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  16. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January.
  17. 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.
  18. Richard Clarida, 2001. "The Empirics of Monetary Policy Rules in Open Economies," NBER Working Papers 8603, National Bureau of Economic Research, Inc.
  19. Wen, Yi, 2001. "A generalized method of impulse identification," Economics Letters, Elsevier, vol. 73(3), pages 367-374, December.
  20. 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.
  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," Working Papers 2004-013, Federal Reserve Bank of St. Louis.

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