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

Author

Listed:
  • Dominique Guegan

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Florian Ielpo

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper intends to show that the variations in the target rate level and the duration between two variations in the target rate do not necessarily react to the same factors. For this purpose, the paper uses a model derived from Engle and Russell (2005). It proposes to model differently the duration between two changes in the target rate and the target rate variations. Extracting the factors driving monetary policy using enhanced principal component analysis, namely the partial least square algorithm, the paper shows that durations and the variations in the target rate time series react differently to each factor.

Suggested Citation

  • Dominique Guegan & Florian Ielpo, 2009. "Understanding the Importance of the Duration and Size of the Variations of Fed's Target Rate," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00439813, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00439813
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    References listed on IDEAS

    as
    1. Robert F. Engle & Jeffrey R. Russell, 1994. "Forecasting Transaction Rates: The Autoregressive Conditional Duration Model," NBER Working Papers 4966, National Bureau of Economic Research, Inc.
    2. Andreas M. Fischer, 2000. "Do Interventions Smooth Interest Rates?," Working Papers 00.04, Swiss National Bank, Study Center Gerzensee.
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