A Dynamic Tobit Model for the Open Market Desk's Daily Reaction Function

Abstract

A dynamic Tobit model with Time-varying parameters is proposed for the daily reaction function of the Open Market Desk of the US Federal Reserve. Such a model offers a more realistic depiction of the Desk's behavior than those of past contributions in the literature as it allows for both possible dynamics in the Desk's daily operations and for day-to-day time varying responses of the Desk to changing conditions in the reserves markets and in the short-term interest rates. Ensuing computational complications are overcome by employing Markov Chain Monte Carlo techniques for the estimation of the model. The results reveal a rich pattern of dynamic behavior by the Open Market Desk both inside the maintenance period and across maintenance periods and point towards a Desk which is highly adaptable to evolving conditions both in the economy in general and in the market for reserves in particularReserves, Federal Funds Rate, Open Market Operations, Open Market Desk, Censored Models, Data Augmentation, Markov Chain Monte Carlo, Gibbs Sampling, Time-Varying Parameter Models