The dynamic relationship between the federal funds rate and the Treasury bill rate: an empirical investigation
Sarno, Lucio and Thornton, Daniel L. (2002) The dynamic relationship between the federal funds rate and the Treasury bill rate: an empirical investigation. Discussion Paper. London: Centre for Economic Policy Research (Great Britain). Discussion paper (Centre for Economic Policy Research (Great Britain)) (No.322).
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This article examines the dynamic relationship between two key US money market interest rates – the federal funds rate and the 3-month Treasury bill rate. Using daily data over the period from 1974-99, we find a long-run relationship between these two rates that is remarkably stable across monetary policy regimes of interest rate and monetary aggregate targeting. Employing a non-linear asymmetric vector equilibrium correction model, which is novel in this context, we find that most of the adjustment toward the long run equilibrium occurs through the federal funds rate. In turn, there is strong evidence for the existence of significant asymmetries and non-linearities in interest rate dynamics that have implications for the conventional view of interest rate behaviour.
|Item Type:||Working or Discussion Paper (Discussion Paper)|
|Subjects:||H Social Sciences > HG Finance|
|Divisions:||Faculty of Social Sciences > Warwick Business School|
|Library of Congress Subject Headings (LCSH):||Monetary policy -- United States, Interest rates -- United States, Federal funds market (United States), Untited States -- Economic policy|
|Series Name:||Discussion paper (Centre for Economic Policy Research (Great Britain))|
|Publisher:||Centre for Economic Policy Research (Great Britain)|
|Place of Publication:||London|
|Official Date:||February 2002|
|Number of Pages:||37|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
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