Interest Rate Targeting and the Dynamics of Short-Term Rates
Silverio Foresi and
Leora Klapper ()
No 5944, NBER Working Papers from National Bureau of Economic Research, Inc
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)
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Published as Journal of Money Credit and Banking, Vol. 30, issue 1 (February 1998) pp. 26-50
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Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:5944
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