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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
Date of revision:
Handle: RePEc:cpr:ceprdp:2479
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  1. Rasmus Fatum & Michael M. Hutchison, . "Is Intervention a Signal of Future Monetary Policy? Evidence from the Federal Funds Futures Market," EPRU Working Paper Series 96-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  2. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper 90-06, Federal Reserve Bank of Richmond.
  3. Barro, Robert J., 1989. "Interest-rate targeting," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 3-30, January.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  10. 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.
  11. 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.
  12. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc.
  13. Graciela L. Kaminsky & Karen K. Lewis, 1996. "Does foreign exchange intervention signal future monetary policy?," Working Papers 96-7, Federal Reserve Bank of Philadelphia.
  14. 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.
  15. Wieland, Volker, 2003. "Monetary Policy and Uncertainty about the Natural Unemployment Rate," CFS Working Paper Series 2003/05, Center for Financial Studies (CFS).
  16. 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.
  17. N. Gregory Mankiw & Jeffrey A. Miron, 1985. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc.
  18. 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.
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