Changes in the Relationship Between the Long-Term Interest Rate and its Determinants

Author/Editor:

William Lee ; Eswar S Prasad

Publication Date:

October 1, 1994

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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

Please address any questions about this title to publications@imf.org