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The Term Structure with Semi‐credible Targeting
Author(s) -
Farnsworth Heber,
Bass Richard
Publication year - 2003
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00548
Subject(s) - yield curve , term (time) , yield (engineering) , constant (computer programming) , observable , function (biology) , econometrics , interest rate , economics , computer science , monetary economics , physics , programming language , quantum mechanics , evolutionary biology , biology , thermodynamics
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.