A Model for the Federal Funds Rate Target

50 Pages Posted: 15 Aug 2000 Last revised: 23 Sep 2002

See all articles by James D. Hamilton

James D. Hamilton

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

Oscar Jorda

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 2000

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 of 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.'

Suggested Citation

Hamilton, James D. and Jorda, Oscar, A Model for the Federal Funds Rate Target (August 2000). NBER Working Paper No. w7847. Available at SSRN: https://ssrn.com/abstract=239090

James D. Hamilton (Contact Author)

University of California at San Diego ( email )

9500 Gilman Drive
Mail code: 0508
La Jolla, CA 92093-0508
United States
619-534-5986 (Phone)
619-534-7040 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Oscar Jorda

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-5549382 (Phone)

HOME PAGE: http://old.econ.ucdavis.edu/faculty/jorda/

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
4159742691 (Phone)

HOME PAGE: http://www.frbsf.org/economic-research/economists/oscar-jorda/

Register to save articles to
your library

Register

Paper statistics

Downloads
55
Abstract Views
1,269
rank
39,985
PlumX Metrics