A Dynamic Tobit Model for the Open Market Desk's Daily Reaction Function

George Monokroussos

No 390, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: A dynamic Tobit model with Time-varying parameters is proposed for the daily reaction function of the Open Market Desk of the US Federal Reserve. Such a model offers a more realistic depiction of the Desk's behavior than those of past contributions in the literature as it allows for both possible dynamics in the Desk's daily operations and for day-to-day time varying responses of the Desk to changing conditions in the reserves markets and in the short-term interest rates. Ensuing computational complications are overcome by employing Markov Chain Monte Carlo techniques for the estimation of the model. The results reveal a rich pattern of dynamic behavior by the Open Market Desk both inside the maintenance period and across maintenance periods and point towards a Desk which is highly adaptable to evolving conditions both in the economy in general and in the market for reserves in particular

Keywords: Reserves; Federal Funds Rate; Open Market Operations; Open Market Desk; Censored Models; Data Augmentation; Markov Chain Monte Carlo; Gibbs Sampling; Time-Varying Parameter Models (search for similar items in EconPapers)
JEL-codes: C15 C22 C24 E4 (search for similar items in EconPapers)
Date: 2006-07-04
New Economics Papers: this item is included in nep-ecm, nep-fmk and nep-mac
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