A competing risks analysis of the duration of federal target funds rates

The behaviour of short term interest rates has been the focus of extensive studies in economics and finance. This paper analyses the duration between changes in the Intended Federal Funds Rate (IFFR) taking into account different factors and the possibility of two outcomes (rate increase and rate decrease). Due to the lack of independence between these outcomes, the use of traditional survival analysis was ruled out and a novel approach based on competing risks is used. The estimation results show the influence of the current interest rate level, US GDP growth rate, US inflation rate, inflation rate differential with Euro-zone and the sign of the previous interest rate change. Test results also confirm that the duration previous to small changes (of a quarter point) and to large changes (above a quarter point) are statistically different for both rate hikes and rate cuts. Accurate confidence intervals for the Cumulative Incidence Function (CIF) are provided even with small sample size under non-normality.