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

  • William Lee
  • Eswar Prasad

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 94/124.

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Length: 30
Date of creation: 01 Oct 1994
Date of revision:
Handle: RePEc:imf:imfwpa:94/124
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