Monetary Policy Shifts and Long-Term Interest Rates
AbstractThe pure expectations hypothesis serves as the benchmark model for the relationship between yields on bonds of different maturities. When coupled with rational expectations, however, empirical renderings of the model fail miserably. The author explores the possibility that failure to account for changes in monetary policy regime explains much of the failure of the pure expectations hypothesis. Estimating changing monetary regimes in conjunction with the pure expectations hypothesis significantly improves its performance. The predicted spread between the long and short rates is highly correlated with the actual spread. The standard deviation of the theoretical spread is nearly identical to that of the actual spread. Copyright 1996, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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Bibliographic InfoArticle provided by MIT Press in its journal Quarterly Journal of Economics.
Volume (Year): 111 (1996)
Issue (Month): 4 (November)
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