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

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.