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The Equilibrium Fed Funds Rate and the Indicator Properties of Term-Structure Spreads

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  • Bomfim, Antulio N

Abstract

This paper introduces a model-based measure of the equilibrium federal funds rate and examines the indicator properties of the spread between observed and equilibrium rates. The results are compared to those of existing studies, which implicitly use long-term interest rates to proxy the equilibrium funds rate. Granger-causality tests suggest that different measures of the term-structure spread are dominated by the funds-rate spread as a forecaster of a wide range of macroeconomic variables. These results are supported by variance-decomposition analysis. The paper also estimates simple VARs to discuss how the policy stance responds to macroeconomic shocks. Copyright 1997 by Oxford University Press.

Suggested Citation

  • Bomfim, Antulio N, 1997. "The Equilibrium Fed Funds Rate and the Indicator Properties of Term-Structure Spreads," Economic Inquiry, Western Economic Association International, vol. 35(4), pages 830-846, October.
  • Handle: RePEc:oup:ecinqu:v:35:y:1997:i:4:p:830-46
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    Cited by:

    1. Ilyas Siklar & Umit Yildiz & Sinan Cakan, 2016. "The Time - Varying Natural Rate of Interest and Its Fundamental Determinants: Time Series Evidence from Turkey," Business and Economic Research, Macrothink Institute, vol. 6(2), pages 390-400, December.
    2. Feng Zhu, 2016. "Understanding the changing equilibrium real interest rates in Asia-Pacific," BIS Working Papers 567, Bank for International Settlements.
    3. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
    4. Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Economic Change and Restructuring, Springer, vol. 31(2), pages 185-204, June.
    5. Clark, Todd E. & Kozicki, Sharon, 2005. "Estimating equilibrium real interest rates in real time," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 395-413, December.
    6. Jean-Paul Lam & Greg Tkacz, 2004. "Estimating Policy-Neutral Interest Rates for Canada Using a Dynamic Stochastic General Equilibrium Framework," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(I), pages 89-126, March.
    7. Kurt F. Lewis & Francisco Vazquez-Grande, 2017. "Measuring the Natural Rate of Interest : Alternative Specifications," Finance and Economics Discussion Series 2017-059, Board of Governors of the Federal Reserve System (U.S.).
    8. Feng Zhu, 2016. "A spectral perspective on natural interest rates in Asia-Pacific: changes and possible drivers," BIS Papers chapters,in: Bank for International Settlements (ed.), Expanding the boundaries of monetary policy in Asia and the Pacific, volume 88, pages 63-149 Bank for International Settlements.
    9. repec:eco:journ1:2017-02-83 is not listed on IDEAS
    10. Christian Bustamante & Luis E. Rojas, 2012. "Constant-Interest-Rate Projections and Its Indicator Properties," BORRADORES DE ECONOMIA 009383, BANCO DE LA REPÚBLICA.
    11. Jesus Crespo-Cuaremsa & Ernest Gnan & Doris Ritzberger-Gruenwald, 2003. "Searching for the natural rate of interest: a euro area perspective," BIS Papers chapters,in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 60-80 Bank for International Settlements.
    12. Olmos, Lorena & Sanso Frago, Marcos, 2014. "Natural Rate of Interest with Endogenous Growth, Financial Frictions and Trend Inflation," MPRA Paper 57212, University Library of Munich, Germany.
    13. Jesús Cuaresma & Ernest Gnan & Doris Ritzberger-Gruenwald, 2004. "Searching for the natural rate of interest: a euro area perspective," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 31(2), pages 185-204, June.
    14. Laubach, Thomas & Williams, John C., 2015. "Measuring the natural rate of interest redux," Working Paper Series 2015-16, Federal Reserve Bank of San Francisco.
    15. repec:onb:oenbwp:y::i:84:b:1 is not listed on IDEAS
    16. Gebhardt Kirschgässner & Marcel Savioz, 2001. "Monetary Policy and Forecasts for Real GDP Growth: An Empirical Investigation for the Federal Republic of Germany," German Economic Review, Verein für Socialpolitik, vol. 2(4), pages 339-365, November.
    17. John C. Williams, 2003. "The natural rate of interest," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct31.
    18. John P. Judd & Glenn D. Rudebusch, 1998. "Taylor's rule and the Fed, 1970-1997," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
    19. Virginia Cartaya & César Fleitas & José Rafael Vivas, 2008. "Midiendo la tasa de interés real natural en Venezuela," Investigación Conjunta-Joint Research,in: Centro de Estudios Monetarios Latinoamericanos (CEMLA) (ed.), Estimación y Uso de Variables no Observables en la Región, edition 1, volume 1, chapter 6, pages 145-163 Centro de Estudios Monetarios Latinoamericanos, CEMLA.
    20. repec:ijc:ijcjou:y:2017:q:3:a:1 is not listed on IDEAS
    21. Roberto Perrelli & Shaun K. Roache, 2014. "Time-Varying Neutral Interest Rate—The Case of Brazil," IMF Working Papers 14/84, International Monetary Fund.
    22. Ray C. Fair, 2005. "Natural Concepts in Macroeconomics," Cowles Foundation Discussion Papers 1525, Cowles Foundation for Research in Economics, Yale University.
    23. Antulio N. Bomfim, 2001. "Measuring equilibrium real interest rates: what can we learn from yields on indexed bonds?," Finance and Economics Discussion Series 2001-53, Board of Governors of the Federal Reserve System (U.S.).

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