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  • 2008 Summer: Volume 6, Issue 1
  • The Fed Funds Rate and Interest Rate Elasticities

    • Kevin M. Bahr ;
    • William E. Maas

    Use this link to view the PDF file: The Fed Funds Rate and Interest Rate Elasticities

    Title:

    The Fed Funds Rate and Interest Rate Elasticities

    Author(s):

    Kevin M. Bahr
    William E. Maas

    Publication Date:

    2008

    Journal Title:

    The Journal of Finance Issues

    Volume Number:

    6

    Issue Number:

    1

    Abstract:

    The federal funds rate is an important short-term interest rate which is targeted by the Federal Reserve to influence economic growth and inflat ion. The financial markets closely monitor the Federal Reserve's monetary policy and changes in the federal funds rate to gauge future economic performance. This research analyzes how changes in the federal funds rate affected the I) yield curve, 2) 30-year fixed mortgage rate, and 3) spread between Aaa and Baa corporate bond yields. The purpose is to determine the rippling effect between changes in the federal funds rate and changes in interest rates that affect the cost of borrowing by firms, individuals, and the government. The empirical results indicate that when a basis point change of 25 points or more occurs to the fed funds rate, which is of a magnitude consistent with a change in Federal Reserve policy, a statistically significant, positively related change occurs in the one-month interest rate elasticities for the 3-Month Treasury rate, I-year Treasury rate, 5- Year Treasury rate, 10-Year Treasury rate, and the 30-Year Mortgage rate.

    First Page:

    101

    Last Page:

    108

    Total Pages:

    7