Working Paper: NBER ID: w13569
Authors: James D. Hamilton
Abstract: This paper develops a generalization of the formulas proposed by Kuttner (2001) and others for purposes of measuring the effects of a change in the fed funds target on Treasury yields of different maturities. The generalization avoids the need to condition on the date of the target change and allows for deviations of the effective fed funds rate from the target as well as gradual learning by market participants about the target. The paper shows that parameters estimated solely on the basis of the behavior of the fed funds and fed funds futures can account for the broad calendar regularities in the relation between fed funds futures and Treasury yields of different maturities. Although the methods are new, the conclusion is quite similar to that reported by earlier researchers-- changes in the fed funds target seem to be associated with quite large changes in Treasury yields, even for maturities up to ten years.
Keywords: No keywords provided
JEL Codes: E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 100 basis point increase in overnight rate (E43) | 50 basis point increase in short-term treasury yields (E43) |
| Unanticipated target changes (E61) | Changes in treasury yields (E43) |
| Historical data (Y10) | Establish patterns in the relationship between fed funds futures and treasury yields (E43) |
| Target changes (E61) | Significant impact on interest rates (E43) |
| Changes in the federal funds target (E52) | Changes in treasury yields (E43) |