A Model for the Federal Funds Rate Target

James D. Hamilton, Oscar Jorda

NBER Working Paper No. 7847
Issued in August 2000
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

This paper is a statistical analysis of the manner in which the Federal Reserve determines the level of the Federal funds rate target, one of the most publicized and anticipated economic indicators in the financial world. The analysis presents two econometric challenges: (1) changes in the target are irregularly spaced in time; (2) the target is changed in discrete increments of 25 basis points. The contributions of this paper are: (1) to give a detailed account of the changing role of the target in the conduct of monetary policy; (2) to develop new econometric tools for analyzing time-series duration data; (3) to analyze empirically the determinants of the target. The paper introduces a new class of models termed autoregressive conditional hazard processes, which allow one to produce dynamic forecasts of the probability of a target change. Conditional on a target change, an ordered probit model produces predictions of the magnitude by which the Fed will raise or lower the Federal funds rate. By decomposing Federal funds rate innovations into target changes and nonchanges, we arrive at new estimates of the effects of a monetary policy shock.'

download in pdf format
   (482 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7847

Published: Hamilton, James D. and Oscar Jorda. "A Model Of The Federal Funds Rate Target," Journal of Political Economy, 2002, v110(5,Oct), 1135-1167. citation courtesy of

Users who downloaded this paper also downloaded* these:
Cochrane and Piazzesi w8839 The Fed and Interest Rates: A High-Frequency Identification
Bernanke w3487 The Federal Funds Rate and the Channels of Monetary Transnission
Taylor A Historical Analysis of Monetary Policy Rules
Hausman, Lo, and MacKinlay w3888 An Ordered Probit Analysis of Transaction Stock Prices
Taylor w14631 The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us