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THE EQUILIBRIUM FED FUNDS RATE AND THE INDICATOR PROPERTIES OF TERM‐STRUCTURE SPREADS
Author(s) -
BOMFIM ANTULIO N.
Publication year - 1997
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1997.tb01967.x
Subject(s) - economics , federal funds , proxy (statistics) , econometrics , variance decomposition of forecast errors , granger causality , term (time) , interest rate , yield curve , variance (accounting) , monetary policy , monetary economics , mathematics , statistics , physics , accounting , quantum mechanics
This paper introduces a model‐based measure of the equilibrium federal funds rate and examines the indicator properties of the spread between observed and equilibrium rates. The results are compared to those of existing studies, which implicitly use long‐term interest rates to proxy the equilibrium funds rate. Granger‐causality tests suggest that different measures of the term‐structure spread are dominated by the funds‐rate spread as a forecaster of a wide range of macroeconomic variables. These results are supported by variance‐decomposition analysis. The paper also estimates simple VARs to discuss how the policy stance responds to macroeconomic shocks