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Interest Rate Targeting and the Dynamics of Short-Term Rates

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  • Balduzzi, Pierluigi, et al

Abstract

A feature of U.S. monetary policy has been active targeting of overnight fed funds rates. The authors show that, during a period of tight targeting (1989-96), term fed funds spreads from the target displayed pronounced volatility and persistence, which increase with the maturity of the loan. They show that the increase in persistence is consistent with a model of infrequent, but predictable, revisions of the target. In the authors' model, the (autoco-)variance of the spreads of term fed funds rates from the target increases with the maturity because longer-term rates reflect persistent expectations of the next target change. Coauthors are Giuseppe Bertola, Silverio Foresi, and Leora Klapper.

Suggested Citation

  • Balduzzi, Pierluigi, et al, 1998. "Interest Rate Targeting and the Dynamics of Short-Term Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(1), pages 26-50, February.
    • Handle: RePEc:mcb:jmoncb:v:30:y:1998:i:1:p:26-50
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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