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The response of the term structure of interest rates to federal funds rate target changes

Author

Listed:
  • V. Vance Roley
  • Gordon H. Sellon

Abstract

In this paper, we first specify a theoretical model of the term structure's response to federal funds rate target changes. The model considers not only the immediate response to target changes, but also the response in anticipation of a policy change. The model is then estimated over the 1974-79 and 1987-95 periods, and the model's restrictions cannot be rejected. The results suggest that policy changes have become more predictable since 1987, causing more of the target change to be reflected in market yields before the policy action is taken. The results also suggest that the economic shocks the Federal Reserve chooses to offset are very persistent, if not permanent.

Suggested Citation

  • V. Vance Roley & Gordon H. Sellon, 1996. "The response of the term structure of interest rates to federal funds rate target changes," Research Working Paper 96-08, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:96-08
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    Citations

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    Cited by:

    1. Lee, Jim, 2002. "Federal funds rate target changes and interest rate volatility," Journal of Economics and Business, Elsevier, vol. 54(2), pages 159-191.
    2. Viktor Kotlán, 2001. "Monetary policy and the term structure of interest rates in a small open economy - a model framework approach," Macroeconomics 0110003, University Library of Munich, Germany.
    3. Rigobon, Roberto & Sack, Brian, 2004. "The impact of monetary policy on asset prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1553-1575, November.
    4. Söderström, Ulf, 1999. "Predicting monetary policy using federal funds future prices," Working Paper Series 85, Sveriges Riksbank (Central Bank of Sweden).
    5. Philip Lowe & Luci Ellis, 1997. "The Smoothing of Official Interest Rates," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    6. Viktor Kotlan, 2002. "Monetary Policy and the Term Spread in a Macro Model of a Small Open Economy," Working Papers 2002/01, Czech National Bank.
    7. Sashikanta Khuntia & Gourishankar S. Hiremath, 2019. "Monetary Policy Announcements and Stock Returns: Some Further Evidence from India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 17(4), pages 801-827, December.
    8. Lee, Jim, 2006. "The impact of federal funds target changes on interest rate volatility," International Review of Economics & Finance, Elsevier, vol. 15(2), pages 241-259.

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