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Federal Funds Rate Stationarity: New Evidence

  • Frédérique Bec

    ()

    (THEMA - Université de Cergy-Pontoise)

  • Charbel Bassil

    ()

    (THEMA - Université de Cergy-Pontoise)

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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File URL: http://www.accessecon.com/Pubs/EB/2009/Volume29/EB-09-V29-I2-P36.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 2 ()
Pages: 867-872

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Handle: RePEc:ebl:ecbull:eb-08c10015
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  1. Lee, Jim, 2002. "Federal funds rate target changes and interest rate volatility," Journal of Economics and Business, Elsevier, vol. 54(2), pages 159-191.
  2. 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.
  3. 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.
  4. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  5. George Kapetanios, 2005. "Unit-root testing against the alternative hypothesis of up to m structural breaks," Journal of Time Series Analysis, Wiley Blackwell, vol. 26(1), pages 123-133, 01.
  6. Anindya Banerjee & Robin L. Lumsdaine & James H. Stock, 1990. "Recursive and Sequential Tests of the Unit Root and Trend Break Hypothesis: Theory and International Evidence," NBER Working Papers 3510, National Bureau of Economic Research, Inc.
  7. 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.
  8. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
  9. James H. Stock & Mark W. Watson, 1998. "Business Cycle Fluctuations in U.S. Macroeconomic Time Series," NBER Working Papers 6528, National Bureau of Economic Research, Inc.
  10. Campbell, John, 1987. "Money Announcements, The Demand for Bank Reserves, and the Behavior of the Federal Funds Rate within the Statement Week," Scholarly Articles 3220231, Harvard University Department of Economics.
  11. 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.
  12. 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.
  13. George Kapetanios, 2002. "Unit Root Testing against the Alternative Hypothesis of up to m Structural Breaks," Working Papers 469, Queen Mary University of London, School of Economics and Finance.
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