THE EQUILIBRIUM FED FUNDS RATE AND THE INDICATOR PROPERTIES OF TERM-STRUCTURE SPREADS

This paper introduces a model-based measure of the equilibrium federal funds rate and examines the indicator properties of the spread betwee n observed and equilibrium rates. The results are compared to those of existing studies, which implicitly use long-term interest rates to pr oxy the equilibrium funds rate. Granger-causality tests suggest that d ifferent measures of the term-structure spread are dominated by the fu nds-rate spread as a forecaster of a wide range of macroeconomic varia bles. These results are supported by variance-decomposition analysis. The paper also estimates simple VARs to discuss how the policy stance responds to macroeconomic shocks.