Abstract

http://ssrn.com/abstract=69310
 
 

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Interest Rate Targeting and the Dynamics of Short-Term Rates


Pierluigi Balduzzi


Boston College - Carroll School of Management

Giuseppe Bertola


Università di Torino - Dipartimento di Economia; Centre for Economic Policy Research (CEPR)

Silverio Foresi


Goldman Sachs Group, Inc. - Quantitative Strategy Group

Leora F. Klapper


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


Journal of Money, Credit and Banking, Vol. 30, No. 1 (1998)

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

Accepted Paper Series


Not Available For Download

Date posted: March 22, 1998  

Suggested Citation

Balduzzi, Pierluigi and Bertola, Giuseppe and Foresi, Silverio and Klapper, Leora F., Interest Rate Targeting and the Dynamics of Short-Term Rates. Journal of Money, Credit and Banking, Vol. 30, No. 1 (1998). Available at SSRN: http://ssrn.com/abstract=69310

Contact Information

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
Università di Torino - Dipartimento di Economia ( email )
Via Po, 53
Torino, 10124
Italy
+39 011 670 2730 (Phone)
+39 011 670 2762 (Fax)
HOME PAGE: http://www.personalweb.unito.it/Giuseppe.Bertola/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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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