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Do Interventions Smooth Interest Rates?

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 Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 00.04.

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Length: 28 pages
Date of creation: Apr 2000
Date of revision:
Handle: RePEc:szg:worpap:0004
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  1. Volker Wieland, 1998. "Monetary policy and uncertainty about the natural unemployment rate," Finance and Economics Discussion Series 1998-22, Board of Governors of the Federal Reserve System (U.S.).
  2. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," NBER Working Papers 7261, National Bureau of Economic Research, Inc.
  3. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  4. Balduzzi, Pierluigi & Bertola, Giuseppe & Foresi, Silverio, 1997. "A model of target changes and the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 223-249, July.
  5. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 211-28, May.
  6. Graciela L. Kaminsky & Karen K. Lewis, 1993. "Does foreign exchange intervention signal future monetary policy?," Finance and Economics Discussion Series 93-1, Board of Governors of the Federal Reserve System (U.S.).
  7. Balduzzi, Pierluigi, et al, 1998. "Interest Rate Targeting and the Dynamics of Short-Term Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(1), pages 26-50, February.
  8. 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.
  9. 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.
  10. 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.
  11. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
  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. 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.
  14. 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.
  15. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January.
  16. 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.
  17. Barro, Robert J., 1989. "Interest-rate targeting," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 3-30, January.
  18. 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.
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