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Why were changes in the federal funds rate smaller in the 1990s?

  • Arabinda Basistha

    (Department of Economics, West Virginia University, USA)

  • Richard Startz

    (Department of Economics, University of Washington, USA)

We identify two major changes in the dynamics of the federal funds rate in the 1990s. We model the desired rate in a two-regime setting, one when the Fed makes no change and the other when the Fed is moving the desired rate to a new level. We find that the 1990s saw a longer duration in the no-change regime as well as smaller changes in the other regime. The smaller changes were neither due to a less aggressive Fed nor due to lower volatility of the fundamentals. In fact, the Fed responded more aggressively to changes in fundamentals in the 1990s. Copyright © 2004 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.745
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File URL: http://qed.econ.queensu.ca:80/jae/2004-v19.3/
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 19 (2004)
Issue (Month): 3 ()
Pages: 339-354

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Handle: RePEc:jae:japmet:v:19:y:2004:i:3:p:339-354
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  1. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  2. Chang-Jin Kim & Charles Nelson & Jeremy M. Piger, 2003. "The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations," Working Papers 2001-016, Federal Reserve Bank of St. Louis.
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  8. Oscar Jorda & James D. Hamilton, 2003. "A model for the federal funds rate target," Working Papers 997, University of California, Davis, Department of Economics.
  9. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
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