Interest Rate Dynamics and Interest Rate Targeting

Graeme Guthrie and Julian Wright

No 33484, Working Paper Series from Victoria University of Wellington, School of Economics and Finance

Abstract: This paper derives the dynamic properties of interest rates at the short end of the yield curve using a model of central bank interest rate targeting. The model predicts that conditional volatility is persistent and increasing in the spread between the market rate and the central bank’s target rate, that there is excess kurtosis in high frequency interest rate movements, and that market rates will revert towards the central bank’s target rate. We show these effects are present in a sample of recent daily data on U.S. interest rates. The results suggest that the spread between market rates and the central bank’s target rate should be considered in empirical models of interest rate dynamics.

Keywords: Interest rates; Fed-funds rate; Dynamics; Volatility (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwecf:33484

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