A Model for the Federal Funds Rate Target

UC Davis Working Paper No. 99-07

44 Pages Posted: 9 Nov 1999

See all articles by James D. Hamilton

James D. Hamilton

University of California at San Diego; National Bureau of Economic Research (NBER)

Oscar Jorda

Federal Reserve Banks - Federal Reserve Bank of San Francisco; University of California, Davis - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 1999

Abstract

This paper is a statistical analysis of the manner in which the Federal Reserve determines the level of the Federal funds rate target, one of the most publicized and anticipated economic indicators in the financial world. The analysis presents two econometric challenges: (1) changes in the target are irregularly spaced in time; (2) the target is changed in discrete increments of 25 basis points. The contributions of this paper are: (1) to give a detailed account of the changing role of the target in the conduct of monetary policy; (2) to develop new econometric tools for analyzing time-series duration data; (3) to analyze empirically the determinants of the target. The paper introduces a new class of models termed autoregressive conditional hazard processes, which allow one to produce dynamic forecasts of the probability of a target change. Conditional on a target change, an ordered probit model produces predictions on the magnitude by which the Fed will raise or lower the Federal funds rate. By decomposing Federal funds rate innovations into target changes and nonchanges, we arrive at new estimates of the effects of a monetary policy "shock."

JEL Classification: C22, C25, C41

Suggested Citation

Hamilton, James D. and Jorda, Oscar, A Model for the Federal Funds Rate Target (September 1999). UC Davis Working Paper No. 99-07, Available at SSRN: https://ssrn.com/abstract=192068 or http://dx.doi.org/10.2139/ssrn.192068

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