TY  - JOUR
AU  - Balduzzi,Pierluigi
AU  - Bertola,Giuseppe
AU  - Foresi,Silverio
TI  - A Model of Target Changes and the Term Structure of Interest Rates
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4347
PY  - 1993
Y2  - April 1993
UR  - http://www.nber.org/papers/w4347
L1  - http://www.nber.org/papers/w4347.pdf
N1  - Author contact info:
Pierluigi Balduzzi
Carroll School of Management
Boston College
330B Fulton Hall
140 Commonwealth Avenue
Chestnut Hill, MA 02467
Tel: 617/552-3976
Fax: 617/552-3985
E-Mail: pierluigi.balduzzi@bc.edu

Giuseppe Bertola
EDHEC
393 promenade des anglais
F-06202 Nice 
E-Mail: giuseppe.bertola@edhec.edu

Silverio Foresi
Salomon Smith Barney
Emerging Markets Derivatives and
Structured Products
388 Greenwich Street
11th Floor
New York, NY  10013
AB  - We explore the effects of official targeting policy on the term-structure of nominal interest rates, adapting relevant insights from theoretical work on "peso problems" to account for realistic infrequency of target changes. Our analysis of daily U.S. interest rates and newly available historical targets provides an interpretation for persistent spreads between short-term money-market rates and overnight fed-funds targets, and for the poor performance of expectations-hypothesis tests: it is the policy-induced component of fed funds dynamics that appears to be erroneously anticipated by the market. Still, allowance for serial correlation in target changes makes it possible to extract from interest-rate data an expected-knoll series which is quite consistent with the assumptions of the model, indicating that some features of the interest-rate-targeting process are incorporated by market expectations.
ER  -