Content area
Abstract
This thesis deals with two separate issues: The econometric modeling and estimation of short term interest rates and the macroeconomic modeling of how the Federal Reserve determines the target for the short term interest rate. The former issues are dealt with in chapters 1 and 2. Chapter 1 develops a methodology for estimating financial time series based on continuous time models which allows for jump discontinuities. It is shown how hypotheses on the parameters of the models can be tested and how to select amongst non nested models using an information criteria. In Chapter 2 the techniques developed in Chapter 1 are applied to the estimation of various models of the dynamics of the one week LIBOR around the target rate set by the central bank. It is further discussed how option pricing may be carried out based on the estimated models. Chapter 3, by contrast, deals with the question of how the Federal Reserve determines the target rate as a function of macroeconomic fundamentals and in particular how the lack of credibility affects the effectiveness of monetary policy in stabilizing inflation and output.
