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Do Interventions Smooth Interest Rates?

  • Fischer, Andreas M

This paper argues that exchange rate tensions delay future changes in the Fed's policy instrument, the federal funds rate. A shift in emphasis towards the exchange rate may conflict with the longer-term policy goals for the domestic economy. The Paper's objective is to consider empirically the influence of exchange rate tensions (proxied by official interventions) on the duration of the target funds rate. Time deformation of the target funds rate is modelled as an autoregressive process following the class of ACD models first proposed by Engle and Russell (1998). The duration of the target funds rate is found to be weakly persistent: a result consistent with several studies in the empirical literature. The introduction of interventions into the ACD model finds that previous interventions lengthen the duration of the target funds rate. This result is found to be robust for several intervention measures.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2479.

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Date of creation: Jun 2000
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Handle: RePEc:cpr:ceprdp:2479
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  1. Pierluigi Balduzzi & Giuseppe Bertola & Silverio Foresi & Leora Klapper, 1997. "Interest Rate Targeting and the Dynamics of Short-Term Rates," NBER Working Papers 5944, National Bureau of Economic Research, Inc.
  2. Lewis, Karen K, 1995. "Are Foreign Exchange Intervention and Monetary Policy Related, and Does It Really Matter?," The Journal of Business, University of Chicago Press, vol. 68(2), pages 185-214, April.
  3. Kaminsky, Graciela L. & Lewis, Karen K., 1996. "Does foreign exchange intervention signal future monetary policy?," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 285-312, April.
  4. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco.
  5. 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.
  6. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  7. Pierluigi Balduzzi & Giuseppe Bertola & Silverio Foresi, 1993. "A Model of Target Changes and the Term Structure of Interest Rates," NBER Working Papers 4347, National Bureau of Economic Research, Inc.
  8. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper 90-06, Federal Reserve Bank of Richmond.
  9. Hung, Juann H, 1997. "Intervention strategies and exchange rate volatility: a noise trading perspective," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 779-793, September.
  10. Wieland, Volker, 2003. "Monetary Policy and Uncertainty about the Natural Unemployment Rate," CFS Working Paper Series 2003/05, Center for Financial Studies (CFS).
  11. Michael W. Klein & Eric S. Rosengren, 1991. "Foreign exchange intervention as a signal of monetary policy," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 39-50.
  12. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
  13. William Roberds, 1992. "What hath the Fed wrought? Interest rate smoothing in theory and practice," Economic Review, Federal Reserve Bank of Atlanta, issue Jan, pages 12-24.
  14. Daniel L. Thornton, 1996. "Does the Fed's new policy of immediate disclosure affect the market?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 77-88.
  15. N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 211-228.
  16. Fatum, Rasmus & Hutchison, Michael, 1999. "Is Intervention a Signal of Future Monetary Policy? Evidece from the Federal Funds Futures Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 54-69, February.
  17. Robert F. Engle & Jeffrey R. Russell, 1998. "Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data," Econometrica, Econometric Society, vol. 66(5), pages 1127-1162, September.
  18. Barro, Robert J., 1989. "Interest-rate targeting," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 3-30, January.
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