More sophisticated econometric procedures have been used to estimate the market’s reaction to Federal Reserve policy, focusing on the unanticipated element of the actions. Using a Vector Autoregression (VAR) tomodelmonetary policy, for example, Edelberg and Marshall (1996) found a large, highly significant response of bill rates to policy shocks, but only a small, marginally significant response of bond rates. Other examples of the VAR approach include Evans and Marshall (1998) and Mehra (1996). In an effort to model the discrete nature of target rate changes, Demiralp and Jorda (1999) examined the response of interest rates using an autoregressive conditional hazard (ACH) model to forecast the timing of changes.
