A Model of Target Changes and the Term Structure of Interest Rates

34 Pages Posted: 11 Nov 2008

See all articles by Pierluigi Balduzzi

Pierluigi Balduzzi

Boston College - Carroll School of Management

Giuseppe Bertola

University of Turin - Department of Economics

Foresi Foresi

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: May 1993

Abstract

We explore the effects of overnight-rate targeting on nominal interest rates of longer maturities. In a realistic model of noisy targeting and infrequent target changes, expectations of future policy actions introduce persistent spreads between interest rates of different maturities. Some empirical features of U.S. money-market daily interest rate data are broadly consistent with our theoretical assumptions and results. Not surprisingly, however, the data reject the expectations-hypothesis (EH) relation that we take as a working assumptions. A newly available series of historical interest-rate targets and simple tests based on our theoretical insights suggest that the EH rejection may be due to erroneous market expectations of the policy-induced component of fed funds dynamics. We briefly discuss how the size and volatility of such expectations may be interpreted from the perspective of our theoretical framework.

Keywords: monetary regimes, expectaions hypothesis, peso problem

Suggested Citation

Balduzzi, Pierluigi and Bertola, Giuseppe and Foresi, Foresi, A Model of Target Changes and the Term Structure of Interest Rates (May 1993). NYU Working Paper No. FIN-94-012, Available at SSRN: https://ssrn.com/abstract=1298819

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

University of Turin - Department of Economics ( email )

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

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

Foresi Foresi

affiliation not provided to SSRN

No Address Available

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