Monetary Policy Implementation and the Federal Funds Rate

Abstract

This paper investigates how the implementation of monetary policy affects the dynamics and the volatility of the federal funds rate. Since the early 1980s, the most important changes in the Fed's conduct of monetary policy refer to the role of the federal funds rate target and the reserve requirement system. We show that the improved communication and transparency regarding the federal funds rate target has significantly increased the Fed's influence on the federal funds rate since 1994. By contrast, the declining role of required reserves in the U.S. has contributed to higher federal funds rate volatility. Our results suggest that the planned introduction of remunerated reserves will further enhance the controllability of the federal funds rate.

Asymmetric effects of federal funds target rate changes on S&P100 stock returns, volatilities and correlations

“…We therefore focus on the effects of surprises. 4 Nautz and Schmidt (2009) show that the link between FOMC target rate announcements and the federal funds rate has become much stronger since 1994 due to improved communication and transparency. Kobayashi (2009) documents the same phenomenon for the US prime rate.…”

Discount window borrowing after 2003: The explicit reduction in implicit costs

“…6 Demiralp and Farley (2005) mention factors such as improvements in internal information systems (including those that track the balance in a bank's Federal Reserve account), banking industry consolidation, or adjustments to the Desk's reaction function as likely reasons for the decline in fed funds volatility in 1990s. Nautz and Schmidt (2009) note that the steps taken towards transparency since 1994 further stabilized the funds rate volatility. 7 One cannot quantify these factors precisely.…”

Overnight interbank markets and the determination of the interbank rate: A selective survey

“…In all countries relying on reserve averaging, overnight rates on settlement days are more volatile than on other days; and higher volatility on settlement day tends to propagate to the immediately preceding days. Nautz and Schmidt (2009) argue that these models 19 fail to consider the effects of changes in the policy rate, including central bank communication policy, and the level of required reserves. They investigate how US monetary policy affects the dynamics and volatility of the Federal funds rate (i t ).…”