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The Responses of the Prime Rate to a Change in Policies of the Federal Reserve

Joseph Friedman and Yochanan Shachmurove ()

No 1405, DETU Working Papers from Department of Economics, Temple University

Abstract: This paper studies the reactions of commercial banks to the changes in monetary policy tools in mid-1994, when the Federal Reserve Bank altered its policy implicitly targeting the Federal Funds Rate (FFR). Prior to 1994, the FFR had affected, with a considerable lag, the Prime Rate. However, after the move by the Fed in 1994, commercial banks responded immediately by changing their Prime lending rate to the Federal Funds Rate plus a three-percent spread. Based on the response of commercial banks, it is evident that a more transparent monetary policy can, in fact, more effectively achieve its underlying objectives.

Keywords: Federal Fund Rate; Prime Rate; Federal Reserve Bank; Monetary Policy; Commercial Banks; Vector Auto Regression (VAR); Vector Error Correction (VEC); Interest Rate Targeting; Unit Root Tests; Granger Causality; Variance Decomposition (search for similar items in EconPapers)
JEL-codes: C15 C32 C58 E00 E4 E5 G00 G2 G38 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-mac and nep-mon
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Journal Article: The responses of the prime rate to change in policies of the Federal Reserve (2015) Downloads
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