A general model for short-term interest rates

A general one-factor model for short-term interest rates is proposed. Besid es the long memory fractionally integrated mean process, the model also con sists of a power function: of the interest rate as well as the GARCH effect in the conditional variance. The estimation results show that, while there is no evidence for fractional integration in the mean beyond the well-know n martingale property, both the power function of the interest rate: and th e GARCH effect (but not the ARCH effect) are highly significant in-the form ation of the conditional variance. Test results also confirm a structure ch ange in October 1979 due to the shift in the Federal Reserve monetary polic y.