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2017•SSRN Electronic JournalOpen access

Monetary Transmission: The Federal Funds Rate and the London Interbank Offered Rate (LIBOR)

Joseph H. Friedman, Yochanan Shachmurove

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Abstract

This paper examines the effectiveness of a monetary transmission mechanism from the federal funds rate to the London Interbank Offered Rate (LIBOR). In particular, the paper employs a co-integration and vector error correction models to examine the degree and the direction of pass-through from the federal funds rate to the LIBOR. Two sub-periods are selected, 1987:02-1994:01 and 1994:02-2002:05, in order to examine this relationship. Results indicate a significant co-integration relationship between the federal funds rate and the LIBOR for the first and second periods. However, in the second period, the two variables adjust differently to a deviation from equilibrium.

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What this paper is about

This paper examines the effectiveness of a monetary transmission mechanism from the federal funds rate to the London Interbank Offered Rate (LIBOR). In particular, the paper employs a co-integration and vector error correction models to examine the degree and the direction of pass-through from the federal funds rate to the LIBOR. Two sub-periods are selected, 1987:02-1994:01 and 1994:02-2002:05, in order to examine this relationship. Results indicate a significant co-integration relationship between the federal funds rate and the LIBOR for the first and second periods. However, in the second period, the two variables adjust differently to a deviation from equilibrium.

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Available abstract

This paper examines the effectiveness of a monetary transmission mechanism from the federal funds rate to the London Interbank Offered Rate (LIBOR). In particular, the paper employs a co-integration and vector error correction models to examine the degree and the direction of pass-through from the federal funds rate to the LIBOR. Two sub-periods are selected, 1987:02-1994:01 and 1994:02-2002:05, in order to examine this relationship. Results indicate a significant co-integration relationship between the federal funds rate and the LIBOR for the first and second periods. However, in the second period, the two variables adjust differently to a deviation from equilibrium.

Key concepts: Libor, Interbank lending market, Federal funds, Economics, Monetary economics, Order (exchange), Interest rate, Monetary policy

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