Changes in the Relationship Between the Long-Term Interest Rate and its Determinants
Summary:
This paper assesses the relative importance of alternative explanations for the rise in long-term interest rates in the United States from October 1993 to April 1994. Standard econometric models of the term structure are shown to have a structural break in the early 1980s. An important reason for this change in the traditional term structure relationship appears to be an increase in the responsiveness of long-term rates to changes in the stance of monetary policy. Augmented term structure models that explicitly incorporate the role of monetary policy in determining the level of long-term rates are then constructed. These models track variations in the long-term rate better than traditional term structure models, but still leave a significant fraction of the recent increase in long-term rates unexplained.
Series:
Working Paper No. 1994/124
Subject:
Financial services Long term interest rates Monetary policy Monetary stance Monetary tightening Short term interest rates Yield curve
English
Publication Date:
October 1, 1994
ISBN/ISSN:
9781451854657/1018-5941
Stock No:
WPIEA1241994
Pages:
30
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