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Regime switching in the dynamic relationship between the federal funds rate and nonborrowed reserves

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  • Chan Guk Huh

Abstract

This paper examines the dynamic relationship between changes in the funds rate and nonborrowed reserves within a reduced form framework that allows the relationship to have two distinct patterns over time. A regime switching model a la Hamilton (1989) is estimated. The two regimes are different in such characteristics as average changes in the interest rate, and volatility. The historical aerate of the API inflation rate is significantly higher in the high growth and more volatile regime. Innovations in money growth are associated with a strong anticipated inflation effect in the high inflation regime, and a moderate liquidity effect in the low inflation regime. Furthermore, the liquidity effect becomes stronger when the economy leaves a low inflation regime period and enters a high inflation regime period. The converse also holds. The anticipated inflation effect becomes stronger upon switching from a low to high inflation regime.

Suggested Citation

  • Chan Guk Huh, 1995. "Regime switching in the dynamic relationship between the federal funds rate and nonborrowed reserves," Working Papers in Applied Economic Theory 95-11, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfap:95-11
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    1. Chan Guk Huh, 1996. "Regime switching in the dynamic relationship between the federal funds rate and innovations in nonborrowed reserves," International Finance Discussion Papers 536, Board of Governors of the Federal Reserve System (U.S.).

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