This paper is statistical analysis of the manner in which the Federal Reserve determines the level of Federal funds rate target, one of the most publicized and anticipated economics 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 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 analyza empirically the determinants of the target. The paper introduces a new class of models termed autoregressive conditional hazard processes, shich allow one to produce dynamic forecasts of probability of a target change. Conditional on a target change, an ordered probit model produces predictions on the magnitude by which the Fed will raise or lower the Federal funds rate. By decomposing Federal funds rate innovations into target changes and nonchangges, we arrive at new estimates of effects of a monetary policy "shock". |