Understanding the Importance of the Duration and Size of the Variations of Fed's Target Rate

Dominique Guegan (1) , Florian Ielpo (1)

1 CES - Centre d'économie de la Sorbonne

This paper intends to show that the variations in the target rate level and the duration between two variations in the target rate do not necessarily react to the same factors. For this purpose, the paper uses a model derived from Engle and Russell (2005). It proposes to model differently the duration between two changes in the target rate and the target rate variations. Extracting the factors driving monetary policy using enhanced principal component analysis, namely the partial least square algorithm, the paper shows that durations and the variations in the target rate time series react differently to each factor.

Mots clés: Taylor rule; duration models; probit models; Central Bank expectations; Factor based methods

Domaines: Economies et finances

Dominique Guegan, Florian Ielpo. Understanding the Importance of the Duration and Size of the Variations of Fed's Target Rate. Journal of Monetary Economics, 2009, 7 (3-4), pp.44-72. ⟨halshs-00439813⟩