The Term Structure with Semi‐credible Targeting

Heber Farnsworth and Richard Bass

Journal of Finance, 2003, vol. 58, issue 2, 839-865

Abstract: The Federal Reserve sets targets for interest rates which it enforces through direct market intervention. These targets are changed periodically. In this paper, we develop a term structure model in which the short rate is subject to a control which keeps it close to a target which changes from time to time. The probability of target changes is not constant in the model, but changes as a function of observables. The model performs well at explaining the shifts in the yield curve that accompany target changes.

Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:58:y:2003:i:2:p:839-865

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