What's Unique about the Federal Funds Rate? Evidence from a Spectral Perspective

27 Pages Posted: 11 Apr 2007

See all articles by Lucio Sarno

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Daniel L. Thornton

Federal Reserve Bank of St. Louis - Research Division

Yi Wen

Federal Reserve Bank of St. Louis - Research Department; Tsinghua University

Abstract

This paper compares the behaviour of the effective federal funds rate to 10 US interest rates with maturities ranging from overnight to 10 years. Using spectral estimation methods, we identified idiosyncratic shocks to the funds rate and provided evidence on their impact on other rates at various frequencies. Our results suggest that, while all of the interest rates examined have common shocks at low frequencies, the federal funds rate contains some unique information at high frequency, although this information appears to be relevant only at the short end of the term structure. In turn, these results are open to various alternative interpretations.

Suggested Citation

Sarno, Lucio and Thornton, Daniel L. and Wen, Yi, What's Unique about the Federal Funds Rate? Evidence from a Spectral Perspective. Oxford Bulletin of Economics and Statistics, Vol. 69, No. 2, pp. 293-319, April 2007. Available at SSRN: https://ssrn.com/abstract=978651 or http://dx.doi.org/10.1111/j.1468-0084.2006.00444.x

Lucio Sarno (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Daniel L. Thornton

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8582 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://research.stlouisfed.org/econ/thornton/

Yi Wen

Federal Reserve Bank of St. Louis - Research Department ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8559 (Phone)
314-444-8731 (Fax)

Tsinghua University ( email )

Beijing, 100084
China

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