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The October 1979 Change in the Monetary Regime: Its Impact on the "Forecastability" of Interest Rates

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James E. Pesando
Andre Plourde

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Abstract

Subsequent to the October 1979 shift in monetary policy in the United States, interest rates in North America not only reached unprecedented levels,but also exhibited unprecedented volatility. This paper shows that the anticipated quarterly changes in long-term rates associated with the rational expectations model have remained small during this post-shift period. Recorded forecasts of long-term interest rates in Canada continue to prove inferior to the no-change prediction of the martingale model. The "perverse" relationship between the slope of the yield curve and the subsequent movementin long-term rates exists in the Canadian data, but is of only modest value in a forecasting context. The excess return on long-term bonds implicit in the recorded forecasts of the level of interest rates varies sharply, yet there is no evidence that forecasters have identified a predictable component of a time-varying term premium.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1874.

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Date of creation: Mar 1986
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Handle: RePEc:nbr:nberwo:1874

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  1. Angelo Melino, 1986. "The Term Structure of Interest Rates: Evidence and Theory," NBER Working Papers 1828, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Campbell, John Y, 1986. " A Defense of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 41(1), pages 183-93, March. [Downloadable!] (restricted)
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  3. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 36(4), pages 769-99, September. [Downloadable!] (restricted)
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