over a long period when economic and financial structures have shifted and the relationships between variables have changed meaningfully. Measuring variables such as the neutral interest rate is also particularly difficult in real-time—especially today—which would limit our ability to analyze the current situation and compare it to historical precedents.<sup>7</sup> While there are multiple reasons to focus on policy interest rates as our main guide to identify cycles in monetary policy, they have several limitations. Although policy interest rates are currently the key tool for adjusting monetary policy, there are periods when other instruments have also been important (including for different goals)—such as adjusting reserve requirements, the money supply, credit controls, and the size and composition of the central bank’s balance sheet. Given our focus on monetary policy today, we incorporate information on QE and QT programs in our measure of rate cycles. For parts of the analysis, we also use the shadow interest rate to incorporate changes in balance sheet policy, but this measure is not available broadly for our sample and is less directly controlled by central banks. Finally, we do not take into account changes in monetary policy goals, frameworks and targets that occurred over the sample period (such as whether a central bank targets inflation, employment, the money supply, or the exchange rate), although we discuss the likely impact of some of these changes on rate cycles over time.<sup>8</sup> Our sample includes 24 advanced economies (including the euro area as a single entity for some parts of the analysis). We select these economies based on several criteria: (i) they are defined as advanced economies in the World Bank’s Global Economic Prospects report, January 2024 (World Bank 2024); (ii) they are independent countries with GDP of at least $100bn in 2023; (iii) they have data for GDP, inflation and interest rates from at least 1980; and (iv) they have not primarily set interest rates in order to target the exchange rate since 1999.<sup>9</sup> Depending on the analysis, we include individual countries that are currently in the euro area, or consider the euro area as an economic entity.

We collect monthly data on the nominal interest rate defined as the policy rate by the central bank from January 1970 through May 2024. Our main source is the BIS, but when data are unavailable or there are gaps, we augment it with information from Haver Analytics, FRED and the OECD. For members of the euro area, we use the policy rate for individual member countries through the end of 1998, and then use the European Central Bank (ECB) policy rate starting in January 1999. It is worth noting that interest rate that the central bank identifies as the policy rate has changed over time in most countries.<sup>10</sup> Also, in many economies the policy rate was substantially more volatile in earlier periods when it was not the central bank’s operating target (e.g., in the 1970s and 1980s some central banks allowed their policy rates to adjust more flexibly 7 See Forbes (2019a) and Kiley (2020) for discussions of the challenges associated with using the neutral interest rate to measure the monetary policy stance, as proposed in Jordà and Taylor (2019). Estimating the neutral rate relies on estimates of the output gap in real time, which is itself subject to significant difficulties (Orphanides and Norden 2002 and Garrat et al. 2008). For a discussion of the determinants of the long-run neutral rate, see Ferreira and Shousha (2023).

8 Countries have adjusted their frameworks and targets meaningfully during the sample, but classifying different regimes is not straightforward, especially as some economies had multiple targets, and others had substantial discretion in how they adjusted policy. Ball (2011), Bernanke and Mishkin (1992) and Federal Reserve Bank of San Francisco (2003) document these changes in frameworks and targets over time. Section 3.2.1 discusses how these differences in targets and frameworks can explain some of the differences in rate cycles over time.

9 We include countries in the ERM in the earlier half of our sample, as well as Switzerland when it had a one-sided band on its exchange rate from 2011-2015.

10 For details of the main policy interest rates and changes over time, see the database “Long Series on Central Bank Policy Rates” compiled by the BIS and available at: <u>https://www.bis.org/statistics/cbpol/cbpol_doc.pdf.</u> 9