Interest Rate Targeting and the Dynamics of Short-Term Rates
Journal of Money Credit And Banking, 1998, 30, 1, 26-50
BALDUZZI, Pierluigi, BERTOLA, Giuseppe, FORESI, Silverio, KLAPPER, Leora, Interest Rate Targeting and the Dynamics of Short-Term Rates, Journal of Money Credit And Banking, 1998, 30, 1, 26-50 - https://hdl.handle.net/1814/16748
Retrieved from Cadmus, EUI Research Repository
A feature of U.S. monetary policy has been active targeting of overnight fed funds rates. We show that during a period of tight targeting (1989-1996) term fed funds spreads from the target displayed pronounced volatility and persistence, which increase with the maturity of the loan. We show that the increase in persistence is consistent with a model of infrequent, but predictable revisions of the target. In our model, the (autoco-)variance of the spreads of term fed funds rates from the target increases with maturity because longer-term rates reflect persistent expectations of the next target change.
Cadmus permanent link: https://hdl.handle.net/1814/16748
Full-text via DOI: 10.2307/2601266
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