1. The Term Structure with Semi-credible Targeting.
- Author
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FARNSWORTH, HEBER and BASS, RICHARD
- Subjects
INTEREST rates ,INVESTMENTS ,FINANCIAL markets ,ECONOMIC forecasting ,FINANCE ,ECONOMIC indicators ,BANKING industry ,ECONOMIC policy ,CENTRAL banking industry ,ECONOMIC models - Abstract
The Federal Reserve sets targets for interest rates which it enforces through direct market intervention. These targets are changed periodically. In this paper, we develop a term structure model in which the short rate is subject to a control which keeps it close to a target which changes from time to time. The probability of target changes is not constant in the model, but changes as a function of observables. The model performs well at explaining the shifts in the yield curve that accompany target changes. [ABSTRACT FROM AUTHOR]
- Published
- 2003
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