Persistence and Long Memory in Monetary Policy Spreads

Guglielmo Maria Caporale and Luis Gil-Alana

No 8664, CESifo Working Paper Series from CESifo

Abstract: The overnight money market rate is a key monetary policy tool. In recent years, central banks worldwide have developed new monetary policy strategies aimed at keeping its deviations from the policy rate small and short-lived. This paper describes the main instruments used for this purpose by the US Fed, the ECB and the BoE and also their policy responses to the Great Financial Crisis (GFC). Fractional integration and long-memory methods are then applied to investigate how those affected the persistence of policy spreads (i.e., the difference between overnight rates and policy rates) during different sub-periods. It is found that this increased sharply during the GFC but has fallen back in recent years. In the case of the ECB the introduction of the new €-STR benchmark in particular appears to have made monetary policy more effective.

Keywords: interest rates; persistence; central banks; long memory; fractional integration (search for similar items in EconPapers)
JEL-codes: C22 E52 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Journal Article: Persistence and long memory in monetary policy spreads (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8664

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