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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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Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2002-02.

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Date of creation: Jan 2002
Date of revision:
Publication status: Forthcoming in Journal of Applied Econometrics
Handle: RePEc:udb:wpaper:uwec-2002-02
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  1. Frederic S. Mishkin, 1988. "What Does the Term Structure Tell Us About Future Inflation?," NBER Working Papers 2626, National Bureau of Economic Research, Inc.
  2. Kim, Chang-Jin & Nelson, Charles R & Piger, Jeremy, 2004. "The Less-Volatile U.S. Economy: A Bayesian Investigation of Timing, Breadth, and Potential Explanations," Journal of Business & Economic Statistics, American Statistical Association, vol. 22(1), pages 80-93, January.
  3. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  4. Dean Croushore, 1998. "Evaluating inflation forecasts," Working Papers 98-14, Federal Reserve Bank of Philadelphia.
  5. Woodford, Michael, 1999. "Optimal monetary policy inertia," CFS Working Paper Series 1999/09, Center for Financial Studies (CFS).
  6. James D. Hamilton & Oscar Jorda, . "A model for the federal funds rate target," Department of Economics 99-07, California Davis - Department of Economics.
  7. Brian P. Sack & Volker W. Wieland, 1999. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Finance and Economics Discussion Series 1999-39, Board of Governors of the Federal Reserve System (U.S.).
  8. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  9. 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 555-76, June.
  10. 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.
  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. 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.
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