The Term Structure with Semi-credible Targeting
The Federal Reserve sets targets for interest rates which it enforces through direct market intervention. These targets are changed periodically. In this paper, we develop a term structure model in which the short rate is subject to a control which keeps it close to a target which changes from time to time. The probability of target changes is not constant in the model, but changes as a function of observables. The model performs well at explaining the shifts in the yield curve that accompany target changes. Copyright (c) 2003 by the American Finance Association.
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Volume (Year): 58 (2003)
Issue (Month): 2 (04)
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