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Federal Reserve interest rate targeting, rational expectations, and the term structure

  • Rudebusch, Glenn D.

The amount of information in the yield curve for forecasting future changes in short rates varies with the maturity of the rates involved. Indeed, spreads between certain long and short rates appear unrelated to future changes in the short rate--contrary to the rational expectations hypothesis of the term structure. This paper estimates a daily model of Federal Reserve interest rate targeting behavior, which, accompanied by the maintained hypothesis of rational expectations, explains the varying predictive ability of the yield curve and elucidates the link between Fed policy and the term structure.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 35 (1995)
Issue (Month): 2 (April)
Pages: 245-274

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Handle: RePEc:eee:moneco:v:35:y:1995:i:2:p:245-274
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  8. Frederic S. Mishkin, 1988. "The Information in the Term Structure: Some Further Results," NBER Working Papers 2575, National Bureau of Economic Research, Inc.
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  10. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
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  13. Shea, Gary S, 1992. "Benchmarking the Expectations Hypothesis of the Interest-Rate Term Structure: An Analysis of Cointegration Vectors," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 347-66, July.
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  17. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
  18. Francis X. Diebold & Glenn D. Rudebusch, 1988. "A nonparametric investigation of duration dependence in the American business cycle," Working Paper Series / Economic Activity Section 90, Board of Governors of the Federal Reserve System (U.S.).
  19. Kenneth A. Froot, 1987. "New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates," NBER Working Papers 2363, National Bureau of Economic Research, Inc.
  20. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 211-28, May.
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  23. Stephen R. Blough, 1994. "Yield curve forecasts of inflation: a cautionary tale," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 3-16.
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