Interest Rate Targeting and the Dynamics of Short-Term Rates

Pierluigi Balduzzi, Giuseppe Bertola, Silverio Foresi and Leora Klapper

No 5944, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We find that in 1989-1996, when U.S. monetary policy tightly targeted overnight fed funds rates, the volatility and persistence of spreads between target and term fed funds levels were larger for longer-maturity loans. We show that such patterns are consistent with an expectational model where target revisions are infrequent and predictable. In our model, the (autoco-) variance of the spreads of term fed funds rates from the target increases with maturity because longer-term rates are more heavily influenced by persistent expectations of future target changes.

JEL-codes: E43 E52 (search for similar items in EconPapers)
Date: 1997-02
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Published as Journal of Money Credit and Banking, Vol. 30, issue 1 (February 1998) pp. 26-50

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Journal Article: Interest Rate Targeting and the Dynamics of Short-Term Rates (1998)
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