US and UK interest rates, 1890-1934: New evidence on structural breaks

This paper presents econometric evidence on whether the founding of the Fed eral 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 t est 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 li kely evolved rapidly to difference stationarity in June 1917. For the Unite d Kingdom we fail to reject the null that U.K. interest rate series follow a difference stationary process over the entire period 1890-1934. Our analy sis differs from previous research on this topic in that we take care to ex plore statistical uncertainty around parameter estimates, and incorporate h igher-order dynamics into our econometric analysis.