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Assessing monetary policy effects using daily federal funds futures contracts

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  • James D. Hamilton

Abstract

This paper develops a generalization of the formulas proposed by Kuttner (2001) and others for purposes of measuring the effects of a change in the federal funds target on Treasury yields of different maturities. The generalization avoids the need to condition on the date of the target change and allows for deviations of the effective fed funds rate from the target as well as gradual learning by market participants about the target. The paper shows that parameters estimated solely on the basis of the behavior of the fed funds and fed funds futures can account for the broad calendar regularities in the relation between fed funds futures and Treasury yields of different maturities. Although the methods are new, the conclusion is quite similar to that reported by earlier researchers-changes in the fed funds target seem to be associated with quite large changes in Treasury yields, even for maturities of up to 10 years.

Suggested Citation

  • James D. Hamilton, 2008. "Assessing monetary policy effects using daily federal funds futures contracts," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 377-394.
  • Handle: RePEc:fip:fedlrv:y:2008:i:jul:p:377-394:n:v.90no.4
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    References listed on IDEAS

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    1. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    2. Angeloni, Ignazio & Faia, Ester & Lo Duca, Marco, 2015. "Monetary policy and risk taking," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 285-307.
    3. Piazzesi, Monika & Swanson, Eric T., 2008. "Futures prices as risk-adjusted forecasts of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 677-691, May.
    4. Andrew Harvey (ed.), 1994. "Time Series," Books, Edward Elgar Publishing, volume 0, number 599.
    5. Sarno, Lucio & Thornton, Daniel L & Valente, Giorgio, 2005. "Federal Funds Rate Prediction," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 449-471, June.
    6. William Poole & Robert Rasche, 2000. "Perfecting the Market's Knowledge of Monetary Policy," Journal of Financial Services Research, Springer;Western Finance Association, vol. 18(2), pages 255-298, December.
    7. Swanson, Eric T., 2006. "Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 791-819, April.
    8. Lange, Joe & Sack, Brian & Whitesell, William, 2003. " Anticipations of Monetary Policy in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 889-909, December.
    9. Jeffrey H. Nilsen, "undated". "Borrowed Reserves, Fed Funds Rate Targets, And the Term Structure," EPRU Working Paper Series 97-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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    Cited by:

    1. Monticini, Andrea & Peel, David & Vaciago, Giacomo, 2011. "The impact of ECB and FED announcements on the Euro interest rates," Economics Letters, Elsevier, vol. 113(2), pages 139-142.
    2. Lapp, John S. & Pearce, Douglas K., 2012. "The impact of economic news on expected changes in monetary policy," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 362-379.
    3. Hamilton, James D., 2008. "Daily monetary policy shocks and new home sales," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1171-1190, October.
    4. Stylianos X. Koufadakis, 2015. "Asymmetries on Closed End Country Funds Premium and Monetary Policy Announcements: An Approach Trough the Perspective of Foreign Countries," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 65(3-4), pages 29-65, july-Dece.

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    Keywords

    Federal funds rate ; Monetary policy;

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