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Fluctuation Dynamics in US Interest Rates and the Role of Monetary Policy

  • Daniel Oliveira Cajueiro
  • Benjamin M. Tabak

This paper presents empirical evidence suggesting that the degree of long-range dependence in interest rates depends on the conduct of monetary policy. We study the term structure of interest rates for the US and find evidence that global Hurst exponents change dramatically according to Chairman Tenure in the Federal Reserve Board and also with changes in the conduct of monetary policy. In the period from 1960's until the monetarist experiment in the beginning of the 1980's interest rates had a significant long-range dependence behavior. However, in the recent period, in the second part of the Volcker tenure and in the Greenspan tenure, interest rates do not present long-range dependence behavior. These empirical findings cast some light on the origins of long-range dependence behavior in financial assets.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps206.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 206.

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Date of creation: Apr 2010
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Handle: RePEc:bcb:wpaper:206
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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  1. Tsay, Wen-Jen, 2000. "Long memory story of the real interest rate," Economics Letters, Elsevier, vol. 67(3), pages 325-330, June.
  2. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
  3. Pilar Grau-Carles, 2005. "Tests of Long Memory: A Bootstrap Approach," Computational Economics, Society for Computational Economics, vol. 25(1), pages 103-113, February.
  4. John Barkoulas & Christopher F. Baum, 1996. "Fractional Dynamics in Japanese Financial Time Series," Boston College Working Papers in Economics 334., Boston College Department of Economics.
  5. Lo, Andrew W, 1991. "Long-Term Memory in Stock Market Prices," Econometrica, Econometric Society, vol. 59(5), pages 1279-313, September.
  6. Sharon Kozicki & P.A.Tinsley, 2001. "What do you expect? : imperfect policy credibility and tests of the expectations hypothesis?," Research Working Paper RWP 01-02, Federal Reserve Bank of Kansas City.
  7. Duffy, John & Engle-Warnick, Jim, 2006. "Multiple Regimes in U.S. Monetary Policy? A Nonparametric Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1363-1377, August.
  8. Lee, Dongin & Schmidt, Peter, 1996. "On the power of the KPSS test of stationarity against fractionally-integrated alternatives," Journal of Econometrics, Elsevier, vol. 73(1), pages 285-302, July.
  9. T. Di Matteo & T. Aste & Michel M. Dacorogna, 2005. "Long-term memories of developed and emerging markets: Using the scaling analysis to characterize their stage of development," Econometrics 0503004, EconWPA.
  10. Jean Boivin, 2005. "Has US Monetary Policy Changed? Evidence from Drifting Coefficients and Real-Time Data," NBER Working Papers 11314, National Bureau of Economic Research, Inc.
  11. Christopher A. Sims & Tao Zha, 2004. "Were there regime switches in U.S. monetary policy?," Working Paper 2004-14, Federal Reserve Bank of Atlanta.
  12. Giraitis, Liudas & Kokoszka, Piotr & Leipus, Remigijus & Teyssiere, Gilles, 2003. "Rescaled variance and related tests for long memory in volatility and levels," Journal of Econometrics, Elsevier, vol. 112(2), pages 265-294, February.
  13. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
  14. Tabak, Benjamin M. & Cajueiro, Daniel O., 2005. "The long-range dependence behavior of the term structure of interest rates in Japan," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 350(2), pages 418-426.
  15. Christina D. Romer & David H. Romer, 2004. "Choosing the Federal Reserve Chair: Lessons from History," Journal of Economic Perspectives, American Economic Association, vol. 18(1), pages 129-162, Winter.
  16. Cajueiro, Daniel O. & Tabak, Benjamin M., 2005. "The rescaled variance statistic and the determination of the Hurst exponent," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 70(3), pages 172-179.
  17. Grau-Carles, Pilar, 2006. "Bootstrap testing for detrended fluctuation analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 360(1), pages 89-98.
  18. David K. Backus & Stanley E. Zin, 1993. "Long-memory Inflation Uncertainty: Evidence from the Term Structure of Interest Rates," NBER Technical Working Papers 0133, National Bureau of Economic Research, Inc.
  19. Dai, Qiang & Singleton, Kenneth J., 2002. "Expectation puzzles, time-varying risk premia, and affine models of the term structure," Journal of Financial Economics, Elsevier, vol. 63(3), pages 415-441, March.
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