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
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)
New Economics Papers: this item is included in nep-mac and nep-mon
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http://www.cla.temple.edu/RePEc/documents/DETU_14_05.pdf First version, 2014 (application/pdf)
Journal Article: The responses of the prime rate to change in policies of the Federal Reserve (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:tem:wpaper:1405
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