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U.S. and U.K. Interest Rates 1890 - 1934: New Evidence on Structural Breaks

Author

Listed:
  • P. Newbold
  • S. J. Leybourne
  • R. Sollis
  • M. E. Wohar

Abstract

This paper presents econometric evidence on whether the founding of the Federal Reserve in 1914 caused a structural change from level-stationarity to difference-stationarity in U.S. and U.K. short-term nominal interest rates. We develop new econometric tests that allow for parameter transitions to test for a break of this kind and undertake a grid search analysis of dates and speeds for the change. We find that U.S. nominal interest rates most likely evolved rapidly to difference-stationarity in June 1917. For the U.K. we fail to reject the null that U.K. interest rate series follow a difference stationary process over the entire period 1890-1934. Our analysis differs from previous research on this topic in that we take care to explore statistical uncertainty around parameter estimates, and incorporate higher order dynamics into our econometric analysis.

Suggested Citation

  • P. Newbold & S. J. Leybourne & R. Sollis & M. E. Wohar, 2001. "U.S. and U.K. Interest Rates 1890 - 1934: New Evidence on Structural Breaks," Trinity Economics Papers 20011, Trinity College Dublin, Department of Economics.
  • Handle: RePEc:tcd:tcduee:20011
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    File URL: http://www.tcd.ie/Economics/TEP/2001_papers/tepno1RS21.PDF
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    References listed on IDEAS

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    1. Mankiw, N Gregory & Miron, Jeffrey A & Weil, David N, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," American Economic Review, American Economic Association, vol. 77(3), pages 358-374, June.
    2. Angelini, Paolo, 1994. "More on the behavior of interest rates and the founding of the Fed," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 537-553, December.
    3. Goodfriend, Marvin, 1988. "Central banking under the gold standard," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 85-124, January.
    4. Barro, Robert J., 1989. "Interest-rate targeting," Journal of Monetary Economics, Elsevier, vol. 23(1), pages 3-30, January.
    5. Lin, Chien-Fu Jeff & Terasvirta, Timo, 1994. "Testing the constancy of regression parameters against continuous structural change," Journal of Econometrics, Elsevier, vol. 62(2), pages 211-228, June.
    6. Clark, Truman A, 1986. "Interest Rate Seasonals and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 76-125, February.
    7. Fishe, Raymond P H & Wohar, Mark, 1990. "The Adjustment of Expectations to a Change in Regime: Comment," American Economic Review, American Economic Association, vol. 80(4), pages 968-976, September.
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    Citations

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    Cited by:

    1. Mario Cerrato & Hyunsok Kim & Ronald MacDonald, 2013. "Nominal interest rates and stationarity," Review of Quantitative Finance and Accounting, Springer, vol. 40(4), pages 741-745, May.
    2. Georgi MARINOV, 2016. "Small Sample Properties Of Panel Cointegration Tests In The Presence Of Structural Change," Journal of Social and Economic Statistics, Bucharest University of Economic Studies, vol. 5(1), pages 35-41, JULY.
    3. Mario Cerrato & Christian De Peretti & Nick Sarantis, 2007. "A nonlinear panel unit root test under cross section dependence," Documents de recherche 07-12, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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