Interest Rate Targeting and the Dynamics of Short-Term Rates

36 Pages Posted: 25 May 2006 Last revised: 7 Oct 2021

See all articles by Pierluigi Balduzzi

Pierluigi Balduzzi

Boston College - Carroll School of Management

Giuseppe Bertola

Centre for Economic Policy Research (CEPR); Università di Torino - Dip. di Economia e Statistica

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group

Leora F. Klapper

World Bank; World Bank - Development Research Group (DECRG)

Multiple version iconThere are 4 versions of this paper

Date Written: February 1997

Abstract

We find that in 1989-1996, when U.S. monetary policy tightly targeted overnight fed funds rates, the volatility and persistence of spreads between target and term fed funds levels were larger for longer-maturity loans. We show that such patterns are consistent with an expectational model where target revisions are infrequent and predictable. In our model, the (autoco-) variance of the spreads of term fed funds rates from the target increases with maturity because longer-term rates are more heavily influenced by persistent expectations of future target changes.

Suggested Citation

Balduzzi, Pierluigi and Bertola, Giuseppe and Foresi, Silverio and Klapper, Leora F., Interest Rate Targeting and the Dynamics of Short-Term Rates (February 1997). Available at SSRN: https://ssrn.com/abstract=225725

Pierluigi Balduzzi (Contact Author)

Boston College - Carroll School of Management ( email )

Department of Finance
140 Commonwealth Avenue - Fulton Hall 438
Chestnut Hill, MA 02467
United States
617-552-3976 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www.bc.edu/bc_org/avp/csom/faculty/

Giuseppe Bertola

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Università di Torino - Dip. di Economia e Statistica ( email )

Lungo Dora Siena 100
Torino, 10153
Italy
+39 011 670 4405 (Phone)

HOME PAGE: http://https://sites.google.com/site/gipbert

Silverio Foresi

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

32 Old Slip, 24th Floor
New York, NY 10005
United States
(212) 357-3508 (Phone)

Leora F. Klapper

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-8738 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/lklapper

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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