Monetary transmission--federal funds rate and prime rate

Two subperiods, 1987:02-1994:01 and 1994:02-2002:05, are selected for examining the relation between the federal funds rate and the prime rate. Empirical evidence from both sample periods reveals a positive cointegration relation representing a pass-through from the federal funds rate to the prime rate. Results from the earlier sample period reveal a two-way causality between the federal funds rate and the prime rate. In contrast, the results from the more recent sample period indicate that causality runs from federal funds to the prime rate.