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Persistence and Nonlinearities in the US Federal Funds Rate

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  • Guglielmo Maria Caporale
  • Luis Alberiko Gil-Alana

Abstract

This paper examines persistence and nonlinearities in the US Federal Funds rate over the period from July 1954 to April 2025 by using fractional integration methods. More precisely, a general model including both deterministic and stochastic components is estimated under alternative assumptions concerning the error term (white noise and autocorrelation), and both linear and a nonlinear specification (the latter based on Chebyshev polynomials) are considered. The empirical results provide evidence of mean reversion but also of high persistence when allowing for autocorrelation in the errors. Moreover, they point towards significant nonlinearities in the stochastic behaviour of the series. Both are important properties of the Federal Funds rate, mainly reflecting underlying inflation persistence and policy shifts respectively.

Suggested Citation

  • Guglielmo Maria Caporale & Luis Alberiko Gil-Alana, 2025. "Persistence and Nonlinearities in the US Federal Funds Rate," CESifo Working Paper Series 11913, CESifo.
    • Handle: RePEc:ces:ceswps:_11913
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    17. Fumitaka Furuoka & Luis A. Gil-Alana & OlaOluwa S. Yaya & Elayaraja Aruchunan & Ahamuefula E. Ogbonna, 2024. "A new fractional integration approach based on neural network nonlinearity with an application to testing unemployment hysteresis," Empirical Economics, Springer, vol. 66(6), pages 2471-2499, June.
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    More about this item

    Keywords

    US Federal Funds rate; fractional integration persistence; nonlinearities;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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