Term Structure Modelling Under Alternative Official Regimes
Posted: 3 Jul 1998
Date Written: October 1995
Monetary authorities exercise control of domestic short term interest rates. We argue that models of the term structure of interest rates must take into account the consequences of this control if they are to capture important empirical features of interest rate dynamics. In particular, previous one or two factor models of the term structure may not adequately describe the short rate process. Interest rate regimes in the United Kingdom, the United States, France and Germany are described. A common characteristic is the presence of "non-effective" official interest rates used for signalling purposes. We construct a term structure model, consistent with general equilibrium, that captures, in idealised form, some important features of these regimes. The paper concludes with an illustrative example of a regime in which the short rate is constrained to lie within an officially controlled corridor.
JEL Classification: G12, G21, G28
Suggested Citation: Suggested Citation