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Federal Funds Rate Stationarity: New Evidence

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Author Info
Frédérique BEC, Charbel BASSIL (Université de Cergy-Pontoise, THEMA, F-95000 Cergy-Pontoise, CREST-INSEE, F- 92245 Malakoff Cedex)

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Abstract

This paper investigates the stationarity of the Federal Funds Rate. It contributes to the existing empirical literature in two ways. First, it explores both the presence of unit root and structural changes in the federal funds rate monthly data, by allowing for interaction between these two assumptions as suggested by the recent work of Lee and Strazicich. The second contribution consists in testing formally for the number of breaks. Using monthly data from January 1960 to April 2008, we find strong evidence in favor of a stationary process with two breaks. The two breaks identified correspond respectively to the first oil shock and to the change in the Fed operating procedure in the early eighties.

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Publisher Info
Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-35.

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Date of creation: 2008
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Handle: RePEc:ema:worpap:2008-35

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Related research
Keywords: Federal Funds Rate; Unit root test; Structural change; Endogenous break dates.;

Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
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  1. Junsoo Lee & Mark C. Strazicich, 2004. "Minimum LM Unit Root Test with One Structural Break," Working Papers 04-17, Department of Economics, Appalachian State University. [Downloadable!]
  2. Lee, Jim, 2002. "Federal funds rate target changes and interest rate volatility," Journal of Economics and Business, Elsevier, vol. 54(2), pages 159-191. [Downloadable!] (restricted)
  3. Stock, James H. & Watson, Mark W., 1999. "Business cycle fluctuations in us macroeconomic time series," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 1, pages 3-64 Elsevier. [Downloadable!] (restricted)
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  4. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February. [Downloadable!] (restricted)
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  5. Nunes, Luis C & Newbold, Paul & Kuan, Chung-Ming, 1997. "Testing for Unit Roots with Breaks: Evidence on the Great Crash and the Unit Root Hypothesis Reconsidered," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(4), pages 435-48, November.
  6. George Kapetanios, 2005. "Unit-root testing against the alternative hypothesis of up to m structural breaks," Journal of Time Series Analysis, Blackwell Publishing, vol. 26(1), pages 123-133, 01. [Downloadable!] (restricted)
  7. John Y. Campbell, 1987. "Money Announcements, the Demand for Bank Reserves and the Behavior of the Federal Funds Rate Within the Statement Week," NBER Working Papers 1806, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22. [Downloadable!]
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  9. Markku Lanne, 1999. "Near Unit Roots And The Predictive Power Of Yield Spreads For Changes In Long-Term Interest Rates," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 393-398, August. [Downloadable!] (restricted)
  10. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
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