Long memory and fractional integration; controllability and persistence of interest rates; new operational framework of the ECB
Controllability of longer-term interest rates requires that the persis-
tence of their deviations from the central bank's policy rate (i.e. the
policy spreads) remains sufficiently low. This paper applies fractional
integration techniques to assess the persistence of policy spreads of
euro area money market rates along the yield curve. Independently
from anticipated policy rate changes, there is strong evidence for all
maturities that policy spreads exhibit long memory. We show that
recent changes in the operational framework and the communication
strategy of the European Central Bank have significantly decreased
the persistence of euro area policy spreads and, thus, have enhanced
the central bank's in uence on longer-term money market rates.
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