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Interest Rate Targeting and the Dynamics of Short-Term Rates

  • Balduzzi, Pierluigi, et al

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.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 30 (1998)
Issue (Month): 1 (February)
Pages: 26-50

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Handle: RePEc:mcb:jmoncb:v:30:y:1998:i:1:p:26-50
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," NBER Working Papers 5031, National Bureau of Economic Research, Inc.
  2. Barrett, W. Brian & Slovin, Myron B. & Sushka, Marie E., 1988. "Reserve regulation and recourse as a source of risk premia in the federal funds market," Journal of Banking & Finance, Elsevier, vol. 12(4), pages 575-584, December.
  3. Campbell, John Y, 1987. "Money Announcements, the Demand for Bank Reserves, and the Behavior of the Federal Funds Rate within the Statement Week," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 56-67, February.
  4. Narasimhan Jegadeesh & George G. Pennacchi, 1996. "The behavior of interest rates implied by the term structure of Eurodollar future," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 426-451.
  5. Melino, Angelo, 1988. " The Term Structure of Interest Rates: Evidence and Theory," Journal of Economic Surveys, Wiley Blackwell, vol. 2(4), pages 335-66.
  6. Barro, Robert J., 1989. "Interest-rate targeting," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 3-30, January.
  7. N. Gregory Mankiw & Jeffrey A. Miron & David N. Weil, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," NBER Working Papers 2124, National Bureau of Economic Research, Inc.
  8. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 211-28, May.
  9. Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1997. "Economic News and the Yield Curve: Evidence from the U.S. Treasury Market," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-005, New York University, Leonard N. Stern School of Business-.
  10. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
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