The Fed and short-term rates: Is it open market operations, open mouth operations or interest rate smoothing?

Thornton, Daniel L.

doi:10.1016/s0378-4266(02)00409-0

Cited by 58 publications

(42 citation statements)

References 51 publications

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“…This is disconcerting because the effect of open market operations should be reflected initially in the federal funds market. Nevertheless, this result is consistent with other attempts at identifying monetary policy shocks using daily data (e.g., Thornton, 2001Thornton, , 2003.…”

Section: Discussionsupporting

confidence: 92%

“…As with SVAR's, identification in DFM requires identifying restrictions. Like Hamilton (1997) and Thornton (2001) we use daily data and rely on aspects of the Fed's operation procedure to identify monetary policy. The approach is novel in that it relies on the fact that monetary policy actions that are unknown to the public should initially affect only the federal funds rate.…”

Section: Does One Of the Factors Represent A Monetary Policy Shock?mentioning

confidence: 99%

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A Dynamic Factor Analysis of the Response of U. S. Interest Rates to News

Lippi

Thornton

2004

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. (2000) to analyze the response of 21 U.S. interest rates to news. Using daily data, we find that the news that affects interest rates daily can be summarized by two common factors. This finding is robust to both the sample period and time aggregation. Each rate has an important idiosyncratic component; however, the relative importance of the idiosyncratic component declines as the frequency of the observations is reduced, and nearly vanishes when rates are observed at the monthly frequency. Using an identification scheme that allows for the fact that when policy actions are unknown to the market the funds rate should respond first to policy actions, we are unable to identifying a unique effect of monetary policy in the funds rate at the daily frequency. Terms of use: Documents in

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Section: Discussionsupporting

confidence: 92%

Section: Does One Of the Factors Represent A Monetary Policy Shock?mentioning

confidence: 99%

A Dynamic Factor Analysis of the Response of U. S. Interest Rates to News

Lippi

Thornton

2004

SSRN Journal

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“…3 See, for example, Guthrie and Wright (2000), Taylor (2001), Demiralp and Jordà (2002), Thornton (2004b) and Nautz and Schmidt (2009 Fact 3. During the pre-94 period, the average size of absolute changes in the prime rate was much larger than that of the funds rate target.…”

Section: The Degree Of Pass-throughmentioning

confidence: 99%

Announcements and the effectiveness of monetary policy: A view from the US prime rate

Kobayashi

2009

Journal of Banking & Finance

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“…The first are estimates obtained only using settlement Wednesdays (SW) and the second are the estimates using all days other than settlement Wednesdays (NSW). The first is the period of explicit funds rate targeting, September 23, 1974-December 31, 1979(e.g., see Cook and Hahn, 1989Thornton, 2004a). The second is the period of monetary aggregate targeting using the nonborrowed reserves operating procedure, October 9, 1979-October 6, 1982.…”

Section: Testing the Expectations Hypothesismentioning

confidence: 99%

Tests of the expectations hypothesis: Resolving the anomalies when the short-term rate is the federal funds rate

Thornton

2005

Journal of Banking & Finance

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The expectations hypothesis (EH) of the term structure plays an important role in the analysis of monetary policy, where shorter-term rates are assumed to be determined by the marketÕs expectation for the overnight federal funds rate. With two exceptions, tests using the effective federal funds rate as the short-term rate easily reject the EH. These exceptions are when the EH is tested over the nonborrowed reserve targeting period and when the test is performed only using data for settlement Wednesdays -the last day of bank reserve maintenance period. This paper argues that these exceptions are anomalous: in the former case, the failure to reject the EH occurs when economic analysis suggests that the market should be less able to forecast the federal funds rate. In the latter case, it occurs when there are sharp spikes in the funds rate that cannot improve materially the marketÕs ability to forecast the funds rate. Additional analysis shows that these anomalous results are a consequence of the procedure used to test the EH.

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The Fed and short-term rates: Is it open market operations, open mouth operations or interest rate smoothing?

Abstract: It is widely believed that the Fed controls the federal funds rate by altering the degree of pressure in the reserve market through open market operations when it changes its target

Cited by 58 publications

References 51 publications

A Dynamic Factor Analysis of the Response of U. S. Interest Rates to News

A Dynamic Factor Analysis of the Response of U. S. Interest Rates to News

Announcements and the effectiveness of monetary policy: A view from the US prime rate

Tests of the expectations hypothesis: Resolving the anomalies when the short-term rate is the federal funds rate

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