Modelling the U.S. interest rate in terms of I(d) statistical models

Abstract The monthly structure of the U.S. interest rate (Federal Funds) has been examined in this article by means of using fractionally integrated techniques. Using a version of the tests of Robinson (1994) that permits us to test I ( d ) statistical models, we show that the order of integration of the series is higher than one if the disturbances are white noise, however, if they are autoregressive, the order of integration appears to be smaller than one. A model selection criterion is then established to determine which might be the most adequate specification, the results showing that it is an I (0.79) process with an intercept and AR(2) disturbances. Thus, the series appears to be non-stationary but mean-reverting, with the effect of the shocks dying away in the long run.

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