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Switching Regimes in the Term Structure of Interest Rates during U.S. Post-War: A Case for the Lucas Proof Equilibrium?

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  • Vázquez Jesús

    ()
    (Universidad del País Vasco)

Abstract

Farmer (1991) suggests that in a model in which there are multiple rational expectations (RE) equilibria agents may find it useful to coordinate their expectations in a unique RE equilibrium which is immune to the Lucas Critique. In this paper, we evaluate Lucas proof (LP) equilibrium performance in the context of the term structure of interest rates model by using post-war US data. Estimation results show that LP equilibrium exhibits some important features of the data that are not reproduced by the fundamental equilibrium. For instance, the short rate behaves as a random walk in a regime characterized by low conditional volatility, whereas the term spread Granger-causes changes in the short-rate in periods characterized by high conditional volatility.

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Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 8 (2004)
Issue (Month): 1 (March)
Pages: 1-41

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Handle: RePEc:bpj:sndecm:v:8:y:2004:i:1:n:5

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Cited by:
  1. Costanza Torricelli & Marianna Brunetti, 2006. "Economic activity and Recession Probabilities: spread predictive power in Italy," Computing in Economics and Finance 2006 350, Society for Computational Economics.
  2. Vázquez, Jesús, 2008. "The comovement between monetary and fiscal policy instruments during the post-war period in the U.S," International Review of Economics & Finance, Elsevier, vol. 17(3), pages 412-424.
  3. Yilmazkuday, Hakan & Akay, Koray, 2008. "An analysis of regime shifts in the Turkish economy," Economic Modelling, Elsevier, vol. 25(5), pages 885-898, September.

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