War Finance and Interest Rate Targeting: Regime Changes in 1914-1918

Posted: 29 Sep 1999

See all articles by Clemens J.M. Kool

Clemens J.M. Kool

Utrecht University - School of Economics

Date Written: August 1994

Abstract

Short-term nominal interest rates in the United States and the United Kingdom experienced a structural change from stationary to nonstationary processes somewhere in the period 1914-1918. The most popular story so far--based on switching-regression techniques--is that the founding of the Federal Reserve in November 1914 caused a simultaneous shift in both countries in early 1915. I use a recursive Bayesian method to show that this conclusion is flawed and the standard method lacks robustness. My results suggest a switch to nonstationarity in late 1915 for the UK and in late 1917 for the US, related to the start of interest targeting in each country after entry into World War I and the consequent need for cheap finance of military expenditures.

JEL Classification: F30

Suggested Citation

Kool, Clemens J.M., War Finance and Interest Rate Targeting: Regime Changes in 1914-1918 (August 1994). Available at SSRN: https://ssrn.com/abstract=5647

Clemens J.M. Kool (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

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