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

Changes in the Relationship Between the Long-Term Interest Rate and its Determinants PDF Author: Mr.William Lee
Publisher: International Monetary Fund
ISBN: 145185465X
Category : Business & Economics
Languages : en
Pages : 30

Book Description
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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