Does the Term Spread Play a Role in the Fed's Reaction Function? An Empirical Investigation

Jesús Vázquez

No 52, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: Using US data for the period 1967:5-2002:4, this paper empirically investigates the performance of a Fed's reaction function (FRF) that (i) allows for the presence of switching regimes, (ii) considers the long-short term spread in addition to the typical variables, (iii) uses an alternative monthly indicator of general economic activity suggested by Stock and Watson (1999), and (iv) considers interest rate smoothing. The estimation results show the existence of three switching regimes, two characterized by low volatility and the remaining regime by high volatility. Moreover, the scale of the responses of the Federal funds rate to movements in the rate of inflation and the economic activity index depends on the regime. The estimation results also show robust empirical evidence that the importance of the term spread in the FRF has increased over the sample period and the FRF has been more stable during the term of office of Chairman Greenspan than in the pre-Greenspan period

Keywords: Fed Funds Rate; Switching Regimes; Term Spread (search for similar items in EconPapers)
JEL-codes: C32 E43 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.ehu.es/jesusvazquez/fedrate1.pdf main text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.ehu.es/jesusvazquez/fedrate1.pdf [301 Moved Permanently]--> https://www.ehu.eus/jesusvazquez/fedrate1.pdf)
http://repec.org/sce2004/up.22438.1076675771.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf4:52

Access Statistics for this paper

More papers in Computing in Economics and Finance 2004 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().