Journal article
Expectations and the term structure of interest rates: Evidence and implications
Economic quarterly - Federal Reserve Bank of Richmond, Vol.88(4), pp.49-95
22 Sep 2002
Abstract
Although the expectations theory is the dominant model of long-term interest rate determination, empirical studies often reject its implications. Taking the theory as a benchmark, work is done to quantify the influence of expectations. Support is found for 2 key implications: that permanent shifts in short-term rates should have a one-for-one effect on long-term rates and that the spread between long and short rates should reflect temporary shifts in short rates. They also find evidence that a common stochastic trend in interest rates is particularly important for the long rate and that temporary deviations from this trend are particularly important for the spread. Although detailed rational expectations restrictions implied by the term structure theory are rejected for US data, it is concluded that the expectations theory remains a useful tool in applied contexts and provide 2 rules of thumb for practitioners.
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Details
- Title
- Expectations and the term structure of interest rates: Evidence and implications
- Creators
- Robert KingAndre Kurmann
- Publication Details
- Economic quarterly - Federal Reserve Bank of Richmond, Vol.88(4), pp.49-95
- Publisher
- Federal Reserve Bank of Richmond
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Identifiers
- 991020550498304721