Title: | A Model of Target Changes and the Term Structure of Interest Rates |
Authors: | Balduzzi, Pierluigi Bertola, Giuseppe Foresi, Foresi |
Keywords: | monetary regimes;expectaions hypothesis;peso problem |
Issue Date: | May-1993 |
Series/Report no.: | FIN-94-012 |
Abstract: | We explore the effects of overnight-rate targeting on nominal interest rates of longer maturities. In a realistic model of noisy targeting and infrequent target changes, expectations of future policy actions introduce persistent spreads between interest rates of different maturities. Some empirical features of U.S. money-market daily interest rate data are broadly consistent with our theoretical assumptions and results. Not surprisingly, however, the data reject the expectations-hypothesis (EH) relation that we take as a working assumptions. A newly available series of historical interest-rate targets and simple tests based on our theoretical insights suggest that the EH rejection may be due to erroneous market expectations of the policy-induced component of fed funds dynamics. We briefly discuss how the size and volatility of such expectations may be interpreted from the perspective of our theoretical framework. |
URI: | http://hdl.handle.net/2451/27166 |
Appears in Collections: | Finance Working Papers |
Files in This Item:
File | Description | Size | Format | |
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wpa94012.pdf | 1.24 MB | Adobe PDF | View/Open |
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