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


  • William Lee
  • Eswar S 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.

Suggested Citation

  • William Lee & Eswar S Prasad, 1994. "Changes in the Relationship Between the Long-Term Interest Rate and its Determinants," IMF Working Papers 94/124, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:94/124

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    References listed on IDEAS

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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.


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