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A Dynamic Factor Analysis of the Response of U.S. Interest Rates to News

  • Marco Lippi
  • Daniel L. Thornton

This paper uses a dynamic factor model recently studied by Forni, Hallin, Lippi and Reichlin (2000) to analyze the response of 21 U.S. interest rates to news. Using daily data, we find that the news that affects interest rates daily can be summarized by two common factors. This finding is robust to both the sample period and time aggregation. Each rate has an important idiosyncratic component; however, the relative importance of the idiosyncratic component declines as the frequency of the observations is reduced, and nearly vanishes when rates are observed at the monthly frequency. Using an identi.cation scheme that allows for the fact that when policy actions are unknown to the market the funds rate should respond first to policy actions, we are unable to identifying a unique effect of monetary policy in the funds rate at the daily frequency.

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Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2004/05.

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Date of creation: 01 Mar 2004
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Handle: RePEc:ssa:lemwps:2004/05
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  1. Duffee, Gregory R, 1996. " Idiosyncratic Variation of Treasury Bill Yields," Journal of Finance, American Finance Association, vol. 51(2), pages 527-51, June.
  2. Lucio Sarno & Daniel L. Thornton, 2003. "The efficient market hypothesis and identification in structural VARs," Working Papers 2003-032, Federal Reserve Bank of St. Louis.
  3. Forni, Mario & Giannone, Domenico & Lippi, Marco & Reichlin, Lucrezia, 2007. "Opening the black box: structural factor models with large cross-sections," Working Paper Series 0712, European Central Bank.
  4. John B. Taylor, 2001. "Expectations, open market operations, and changes in the federal funds rate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 33-58.
  5. Hamilton, James D, 1997. "Measuring the Liquidity Effect," American Economic Review, American Economic Association, vol. 87(1), pages 80-97, March.
  6. Forni, Mario & Lippi, Marco, 2000. "The Generalized Dynamic Factor Model: Representation Theory," CEPR Discussion Papers 2509, C.E.P.R. Discussion Papers.
  7. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
  8. Lucio Sarno & Daniel Thornton & Yi Wen, 2002. "What's Unique About the Federal Funds Rate? Evidence from a Spectral Perspective," Working Papers wpn02-01, Warwick Business School, Finance Group.
  9. Forni, Mario & Lippi, Marco & Reichlin, Lucrezia, 2003. "Opening the Black Box: Structural Factor Models versus Structural VARs," CEPR Discussion Papers 4133, C.E.P.R. Discussion Papers.
  10. Sarno, Lucio & Daniel l Thornton & Giorgio Valente, 2003. "Federal Funds Rate Prediction," Royal Economic Society Annual Conference 2003 183, Royal Economic Society.
  11. Garfinkel, Michelle R & Thornton, Daniel L, 1995. "The Information Content of the Federal Funds Rate: Is It Unique?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 838-47, August.
  12. Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
  13. Daniel L. Thornton, 2001. "Identifying the liquidity effect at the daily frequency," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 59-82.
  14. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
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