Interest Rate Targeting and the Dynamics of Short-Term Rates

Posted: 22 Mar 1998

See all articles by Pierluigi Balduzzi

Pierluigi Balduzzi

Boston College - Carroll School of Management

Giuseppe Bertola

Centre for Economic Policy Research (CEPR); Università di Torino - Dip. di Economia e Statistica

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group

Leora F. Klapper

World Bank; World Bank - Development Research Group (DECRG)

Multiple version iconThere are 4 versions of this paper

Abstract

A characteristic feature of U.S. monetary policy has been the active targeting of the overnight fed funds rate by the Federal Reserve. We show that during the 1989-1996 period, in spite of the effective targeting of the overnight fed funds rate, term fed funds rates displayed volatile and persistent spreads from the target. Moreover, the volatility and persistence of these spreads increase with the maturity of the loan. This behavior is consistent with an expectational model of short-term rates which accounts for interest rate targeting with predictable and infrequent revisions of the target, on a daily time scale. Our model successfully replicates the stylized fact that the (autoco-)variance of the spreads of term fed funds rates from the target increases with maturity, because longer-term rates reflect more heavily persistent expectations of the next target change.

JEL Classification: E43, E44, E52

Suggested Citation

Balduzzi, Pierluigi and Bertola, Giuseppe and Foresi, Silverio and Klapper, Leora F., Interest Rate Targeting and the Dynamics of Short-Term Rates. Available at SSRN: https://ssrn.com/abstract=69310

Pierluigi Balduzzi (Contact Author)

Boston College - Carroll School of Management ( email )

Department of Finance
140 Commonwealth Avenue - Fulton Hall 438
Chestnut Hill, MA 02467
United States
617-552-3976 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www.bc.edu/bc_org/avp/csom/faculty/

Giuseppe Bertola

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Università di Torino - Dip. di Economia e Statistica ( email )

Lungo Dora Siena 100
Torino, 10153
Italy
+39 011 670 4405 (Phone)

HOME PAGE: http://https://sites.google.com/site/gipbert

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group ( email )

32 Old Slip, 24th Floor
New York, NY 10005
United States
(212) 357-3508 (Phone)

Leora F. Klapper

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-8738 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/lklapper

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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