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

Author

Listed:
  • Mr. William Lee
  • Mr. Eswar S Prasad

Abstract

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.

Suggested Citation

  • Mr. William Lee & Mr. Eswar S Prasad, 1994. "Changes in the Relationship Between the Long-Term Interest Rate and its Determinants," IMF Working Papers 1994/124, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1994/124
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=1279
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    Citations

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    Cited by:

    1. Kelly R Eckhold, 1998. "Determinants of New Zealand bond yields," Reserve Bank of New Zealand Discussion Paper Series G98/1, Reserve Bank of New Zealand.
    2. Suzan Hol, 2006. "Determinants of long-term interest rates in the Scandinavian countries," Discussion Papers 469, Statistics Norway, Research Department.
    3. Michelle Lewis & Lauren Rosborough, 2013. "What in the world moves New Zealand bond yields?," Reserve Bank of New Zealand Analytical Notes series AN2013/08, Reserve Bank of New Zealand.

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