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What's unique about the federal funds rate? evidence from a spectral perspective

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  • Lucio Sarno
  • Daniel L. Thornton
  • Yi Wen

Abstract

A large empirical literature attempts to identify US monetary policy shocks using the effective federal funds rate. This paper compares the time series behavior of the effective federal funds rate to 10 US interest rates with maturities ranging form overnight to 10 years. Using a spectral estimation procedure that is particularly suitable and novel in the context, we identify idiosyncratic shocks to the federal funds rate and provide evidence on their impact on other US interest rates at various frequencies. Our results suggest that, while all of the interest rates examined have common shocks at low frequency, the federal funds rate contains some unique information at high frequency, although this information appears to be relevant only at the short end of the term structure of interest rates. In turn, these results are open to various alternative interpretations.

Suggested Citation

  • Lucio Sarno & Daniel L. Thornton & Yi Wen, 2002. "What's unique about the federal funds rate? evidence from a spectral perspective," Working Papers 2002-029, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2002-029
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    References listed on IDEAS

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    1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1994. "Identification and the effects of monetary policy shocks," Working Paper Series, Macroeconomic Issues 94-7, Federal Reserve Bank of Chicago.
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    Cited by:

    1. Hammoudeh, Shawkat & Sari, Ramazan, 2011. "Financial CDS, stock market and interest rates: Which drives which?," The North American Journal of Economics and Finance, Elsevier, vol. 22(3), pages 257-276.
    2. Marco Lippi & Daniel L. Thornton, 2004. "A Dynamic Factor Analysis of the Response of U.S. Interest Rates to News," LEM Papers Series 2004/05, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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    Keywords

    Federal funds rate ; Interest rates;

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