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Title: Do Interventions Smooth Interest Rates?

Author(s): Andreas M Fischer

Publication Date: June 2000

Keyword(s): Duration, Federal Funds Rate and Interest Rate Smoothing

Programme Area(s): International Macroeconomics

Abstract: This paper argues that exchange rate tensions delay future changes in the Fed's policy instrument, the federal funds rate. A shift in emphasis towards the exchange rate may conflict with the longer-term policy goals for the domestic economy. The Paper's objective is to consider empirically the influence of exchange rate tensions (proxied by official interventions) on the duration of the target funds rate. Time deformation of the target funds rate is modelled as an autoregressive process following the class of ACD models first proposed by Engle and Russell (1998). The duration of the target funds rate is found to be weakly persistent: a result consistent with several studies in the empirical literature. The introduction of interventions into the ACD model finds that previous interventions lengthen the duration of the target funds rate. This result is found to be robust for several intervention measures.

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Bibliographic Reference

Fischer, A. 2000. 'Do Interventions Smooth Interest Rates?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2479