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I am conducting a Dickey-Fuller unit root test on the FEDFUNDS series from the FRED database. My estimation period is quarterly from 1955(1) to 2007(4) (taking the average of the monthly rates within each quarter).

Using the DF regression / AR model:

$$\Delta y_t = \delta + y_{t-1} + c_1 \Delta y_{t-1} + \epsilon_t$$

where $\delta$ is the constant term. Theoretically, the series should exhibit stationarity, however using a normal t-test I find that the series rejects the null hypothesis of a unit root (-2.88 against a critical value of -2.86 at 5 % significance (David and MacKinnon 1993)), but the model exhibits autocorrelation. Does this mean I cannot use my econometric findings? If I conduct a Likelihood ratio test setting both $\delta = c_1 = 0$ I get a likehood ratio of 8.26 which is within the critical value of 9.13 however the model still exhibits autocorrelation.

Am I missing something? In my theoretical model and using existing litterature I could support the claim that the effective federal funds rate should be a stationairy process but my econometric analysis indicate otherwise.

EDIT: Linking to my data in my Github repository which I just created. I have taken the average EFFR of each quarter to represent quarterly data from the FEDFUNDS series as stated previously.

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  • $\begingroup$ The lagged difference is there to account for autocorrelation. (Whether one lagged difference is enough is another matter, information criteria like AIC can guide you in picking an optimal number.) $\endgroup$
    – Christoph Hanck
    Commented Jun 3, 2022 at 12:57

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The ADF test has a number of assumptions including

  • no outliers/level/shifts/time/trends/seasonal pulses

  • constant error variance over time

  • constant model parameters over time

Perhaps one or more of these assumptions is invalid. Post your data and I will try and help further.

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  • $\begingroup$ Thank you I just uploaded my data to my github repository. $\endgroup$
    – BlackBear
    Commented Mar 13, 2019 at 13:37
  • $\begingroup$ i had problems getting access to GITHUB . please send it to me via email ( an xls file would be good or a text file) at [email protected] $\endgroup$
    – IrishStat
    Commented Mar 13, 2019 at 20:03
  • $\begingroup$ Sorry for the delay, I just send you an e-mail. Thanks for your time! $\endgroup$
    – BlackBear
    Commented Mar 14, 2019 at 9:48

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