Chapter 10: Estimation of the US Treasury Yield Curve at Daily and Intra-Daily Frequency
* Lawrence R. Klein and Süleyman Özmucur In this era of gravitation by central banks towards inflation targeting, an examination of its use as a major guide for macroeconomic policy and performance is needed. The main policy instrument is the very short-term interest rate. In the USA, this becomes the federal funds rate, which is an overnight rate for reconciling required reserve balances among private banks. The Federal Reserve and other central banks are quite accurate in hitting their target values for the operative short-term rate (the federal funds rate in the USA). For other countries different target rates are used, and there is no question that central banks in the main advanced economies can hit their short-run targets with great accuracy. Control over the operative rate is, however, only the first step in implementation of monetary policy. Economy-watchers attach great importance to the signals given off by announcements of the targets for the operative rates, but do these rates serve well as guides to the state of monetary policy – in the direction of credit tightening, easing, or staying put? The entire yield curve and the entire span of interest rates are what really matter, not to mention non-monetary policies, and our first step in this study is to examine how good is the control over operative rates for interpreting the dynamics of the whole spectrum of rates in any given economy. Figure 10.1, depicting some relevant time series of US interest rates from 1990 to early 2006, shows the...
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