The Dynamic Relationship Between the Federal Funds rate and the Treasury Bill Rate: An Empirical Investigation

By Lucio Sarno, Daniel L. Thornton. 2003

146 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/d9ea92a1618624f1f3cf51c314707d5c8009940d

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Citations in the corpus

The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates (2006, background): “Further, there is evidence that the dynamic adjustment of the term structure in response to deviations from equilibrium may in fact be asymmetric (Enders and Granger, 1998; Sarno and Thornton, 2003) and characterized by regime shifts (Hamilton, 1988; Gray, 1996; Bansal and Zhou, 2002).”
The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields (2007, background): “See also Hall, Anderson, and Granger (1992), Engsted and Tangaard (1994), Sarno and Thornton (2003), Clarida, Sarno, Taylor and Valente (2006).”