Understanding the Importance of the Timing and the Size of the Variations the Fed's Target Rate

Abstract

This article intends to show that the variations of the target rate level and the duration between two variations of the target rate do not necessarily react to the same factors. For this purpose, we use a model derived from Engle and Russell (2005): we propose to model differently the duration between two changes in the target rate and the target rate variations. Extracting the factors driving monetary policy using an enhanced principal component analysis - namely the partial least square algorithm - we show that durations and the variations of the target rate time series react differently to each of these factors.

Keywords: Taylor rule, duration models, probit models, Central Bank expectations, Factor based methods

JEL Classification: C32, E58