Persistence and cycles in the US federal funds rate

Caporale, Guglielmo Maria and Gil-Alana, Luis A. (2012) Persistence and cycles in the US federal funds rate. Centre for EMEA Banking, Finance and Economics Working Paper Series, 2012 (39). pp. 1-25.

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Abstract

This paper uses long-range dependence techniques to analyse two important features of the US Federal Funds effective rate, namely its persistence and cyclical behaviour. It examines annual, monthly, bi-weekly and weekly data, from 1954 until 2010. Two models are considered. One is based on an I(d) specification with AR(2) disturbances and the other on two fractional differencing structures, one at the zero and the other at a cyclical frequency. Thus, the two approaches differ in the way the cyclical component of the process is modelled. In both cases we obtain evidence of long memory and fractional integration. The in-sample goodness-of-fit analysis supports the second specification in the majority of cases. An out-of-sample forecasting experiment also suggests that the long-memory model with two fractional differencing parameters is the most adequate one, especially over long horizons.

Item Type: Article
Uncontrolled Keywords: Centre for EMEA Banking, Finance and Economics Working Paper Series; Federal Funds rate; persistence; cyclical behaviour; fractional integration
Subjects: 300 Social sciences > 330 Economics
Department: Guildhall School of Business and Law
Depositing User: Mary Burslem
Date Deposited: 17 Apr 2015 11:15
Last Modified: 20 Apr 2015 11:31
URI: http://repository.londonmet.ac.uk/id/eprint/398

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