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How Does the Duffie-Krishnamurthy Index Behave When Each of Its Five Largest Inputs Is Excluded?
Click a legend entry to show/hide series.
DK index with selected inputs (left scale)
All money markets (original DK index)
All but certificates of deposit
All but financial commercial paper
All but agency and MBS repos (TPR)
All but Eurodollar deposits
All but Treasury repos (TPR)
Fed funds rate (right scale)
Money Market Rates
Money Market Volumes
Certificates of deposit
Financial commercial paper
Agency and MBS repos (TPR)
Treasury repos (TPR)
Money Market Volumes
Sources: Duffie and Krishnamurthy (2016); FRED; authors’ calculations.
Notes: Repo data are from the tri-party repo (TPR) market. Eurodollar deposits constitute both overnight and term deposits. The target fed funds rate is the median of the target band after December 16, 2008.
A new measure—the Duffie-Krishnamurthy dispersion index (DK index)—suggests that money markets no longer respond to
shifts in policy rates as readily as they used to. The interactive chart above provides a closer look at the measure and
The upper panel shows the DK index, which captures how much individual money market rates deviate from the average rate across markets. Higher dispersion corresponds to lower efficiency of monetary policy pass-through.
The lower panels show data for the five money markets that make the greatest contributions to the DK index, as determined by volume.
The index seems to show a decline in pass-through in recent years, registered as an increase in dispersion following a series of hikes in the fed funds rate (starting in December 2015). Dispersion does not seem to have increased during the Fed’s 2004–06 tightening cycle.
What’s behind the current upswing in dispersion? The answer has to do with one of the inputs used in the DK index—specifically an interest rate on certificates of deposit (CDs). Unlike other money market rates, this CD rate has remained flat since the Fed’s policy “liftoff” in December 2015.
Note that the DK index, in an effort to use only publicly available data, incorporates two different interest rates for CDs: a secondary-market rate until mid-2013 (when the series was discontinued) and a primary-market rate thereafter.
The secondary-market rate, available to institutional investors, tracks shifts in the fed funds rate much more closely than the primary-market rate, which is more representative of what retail investors can access.
That change in inputs explains why hikes in the fed funds rate after 2013 appear to trigger increased dispersion. Since CDs have roughly twice the volume as the next largest market, they have a considerable impact on the DK index. When CD rates are excluded from the index—as in the red line in the upper panel—the index no longer suggests that pass-through has deteriorated in recent years.