A Federal Funds Rate Equation
45 Pages Posted: 15 Nov 2012
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A Federal Funds Rate Equation
Date Written: May 1, 1995
Abstract
This paper presents evidence that indicates that U.S. interest rate policy during most of the 1980s can be described by a reaction function in which the federal funds rate rises if real GDP rises above trend GDP, if actual inflation accelerates, or if the long-term bond rate rises. Money growth when included in the reaction function is significant, indicating that money also influenced policy. The results presented here however indicate that in recent years the Fed has discounted the leading indicator properties of money. In contrast, the bond rate has been a key determinant of the funds rate during the period 1979 to 1992.
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