Why were changes in the federal funds rate smaller in the 1990s?

✍ Scribed by Arabinda Basistha; Professor Richard Startz

• Book ID: 102289673
• Publisher: John Wiley and Sons
• Year: 2004
• Tongue: English
• Weight: 148 KB
• Volume: 19
• Category: Article
• ISSN: 0883-7252
• DOI: 10.1002/jae.745

✦ Synopsis

Abstract

We identify two major changes in the dynamics of the federal funds rate in the 1990s. We model the desired rate in a two‐regime setting, one when the Fed makes no change and the other when the Fed is moving the desired rate to a new level. We find that the 1990s saw a longer duration in the no‐change regime as well as smaller changes in the other regime. The smaller changes were neither due to a less aggressive Fed nor due to lower volatility of the fundamentals. In fact, the Fed responded more aggressively to changes in fundamentals in the 1990s. Copyright © 2004 John Wiley & Sons, Ltd.