A Model for the Federal Funds Rate Target

James Hamilton and Oscar Jorda

No 7847, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper is a statistical analysis of the manner in which the Federal Reserve determines the level of the Federal funds rate target, one of the most publicized and anticipated economic indicators in the financial world. The analysis presents two econometric challenges: (1) changes in the target are irregularly spaced in time; (2) the target is changed in discrete increments of 25 basis points. The contributions of this paper are: (1) to give a detailed account of the changing role of the target in the conduct of monetary policy; (2) to develop new econometric tools for analyzing time-series duration data; (3) to analyze empirically the determinants of the target. The paper introduces a new class of models termed autoregressive conditional hazard processes, which allow one to produce dynamic forecasts of the probability of a target change. Conditional on a target change, an ordered probit model produces predictions of the magnitude by which the Fed will raise or lower the Federal funds rate. By decomposing Federal funds rate innovations into target changes and nonchanges, we arrive at new estimates of the effects of a monetary policy shock.'

JEL-codes: C22 C25 (search for similar items in EconPapers)
Date: 2000-08
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Published as Hamilton, James D. and Oscar Jorda. "A Model Of The Federal Funds Rate Target," Journal of Political Economy, 2002, v110(5,Oct), 1135-1167.

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Working Paper: A model for the federal funds rate target (2003)
Journal Article: A Model of the Federal Funds Rate Target (2002)
Working Paper: A model for the federal funds rate target
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