Persistence and Nonlinearities in the US Federal Funds Rate

Guglielmo Maria Caporale and Luis Alberiko Gil-Alana

No 11913, CESifo Working Paper Series from CESifo

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.

Keywords: US Federal Funds rate; fractional integration persistence; nonlinearities (search for similar items in EconPapers)
JEL-codes: C22 E43 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_11913

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