Persistence and long memory in monetary policy spreads

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

JEL CLASSIFICATION:

• C22
• E52

Acknowledgments

Luis A. Gil-Alana gratefully acknowledges financial support from the Grant PID2020-113691RB-I00 funded by MCIN/AEI/10.13039/501100011033. Comments from the Editor and an anonymous reviewer are gratefully acknowledged.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ For more details please visit the official ECB website https://www.ecb.europa.eu/mopo/implement/omo/html/index.en.html.

Additional information

Funding

The work was supported by the Ministerio de Ciencia e Innovación [PID2020-113691RB-I00 funded by MCIN/AEI/ 10.13039/].