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

38 Pages Posted: 28 Dec 2006 Last revised: 19 Nov 2022

See all articles by Pierluigi Balduzzi

Pierluigi Balduzzi

Boston College - Carroll School of Management

Giuseppe Bertola

University of Turin - Department of Economics

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group

Multiple version iconThere are 2 versions of this paper

Date Written: April 1993

Abstract

We explore the effects of official targeting policy on the term-structure of nominal interest rates, adapting relevant insights from theoretical work on "peso problems" to account for realistic infrequency of target changes. Our analysis of daily U.S. interest rates and newly available historical targets provides an interpretation for persistent spreads between short-term money-market rates and overnight fed-funds targets, and for the poor performance of expectations-hypothesis tests: it is the policy-induced component of fed funds dynamics that appears to be erroneously anticipated by the market. Still, allowance for serial correlation in target changes makes it possible to extract from interest-rate data an expected-knoll series which is quite consistent with the assumptions of the model, indicating that some features of the interest-rate-targeting process are incorporated by market expectations.

Suggested Citation

Balduzzi, Pierluigi and Bertola, Giuseppe and Foresi, Silverio, A Model of Target Changes and the Term Structure of Interest Rates (April 1993). NBER Working Paper No. w4347, Available at SSRN: https://ssrn.com/abstract=478743

Pierluigi Balduzzi (Contact Author)

Boston College - Carroll School of Management ( email )

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Giuseppe Bertola

University of Turin - Department of Economics ( email )

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Silverio Foresi

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

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