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Why Were Changes in the Federal Funds Rate Smaller in the 1990s?


  • Arabinda Basistha

    (University of Washington)

  • Richard Startz

    (University of Washington)


In this paper, we identify two major changes in the dynamics of the federal funds rate in the 1990s. We model the desired rate in a two-regime setting, one when the Fed makes no change and the other when the Fed is moving the desired rate to a new level. We find that the 1990s saw longer duration in the no-change regime as well as smaller changes in the other regime. We show the smaller changes were neither due to a less aggressive Fed nor due to lower volatility of the fundamentals. In fact, the Fed responded more aggressively to changes in fundamentals in the 1990s. The results also suggest that the Fed became more forward-looking in the last decade.

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  • Arabinda Basistha & Richard Startz, 2002. "Why Were Changes in the Federal Funds Rate Smaller in the 1990s?," Working Papers UWEC-2002-02, University of Washington, Department of Economics.
  • Handle: RePEc:udb:wpaper:uwec-2002-02

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    References listed on IDEAS

    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
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    6. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    7. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    8. 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.
    9. Dean Croushore, 1998. "Evaluating inflation forecasts," Working Papers 98-14, Federal Reserve Bank of Philadelphia.
    10. Sack, Brian & Wieland, Volker, 2000. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 205-228.
    11. Yash P. Mehra, 1998. "The bond rate and actual future inflation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 27-47.
    12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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