The excess sensitivity of long-term interest rates
Subtitle: evidence and implications for macroeconomic models
By: Refet S. Gurkaynak, Brian Sack and Eric Swanson.
Contributors: Sack, Brian.; Swanson, Eric T.
Series: Finance and economics discussion series ;; 2003-50; Finance and economics discussion series (Online) ;; 2003-50.
Publisher: Federal Reserve Board
Published: 2003
Place of publication: Washington, D.C
Language: eng
Format: Electronic resource
Subjects: Interest rates -- United States.; Monetary policy -- United States.
Description: "This paper demonstrates that long-term forward interest rates in the U.S.  often react considerably to surprises in macroeconomic data releases and monetary policy announcements.  This behavior is inconsistent with the assumption of many macroeconomic models that the long-run properties of the economy are time-invariant and perfectly known by all economic agents.  Under those conditions, the shocks we consider would have only transitory effects on short-term interest rates, and hence would not generate large responses in forward rates.  Our empirical findings suggest that private agents adjust their expectations of the long-run inflation rate in response to macroeconomic and monetary policy surprises.  Consistent with our hypothesis, forward rates derived from inflation-indexed Treasury debt show little sensitivity to these shocks, indicating that the response of nominal forward rates is mostly driven by inflation compensation.  In addition, we find that in the U.K., where the long-run inflation target is known by the private sector, long-term forward rates have not demonstrated excess sensitivity since the Bank of England achieved independence in mid-1997.  We present an alternative model in which agents' perceptions of long-run inflation are not completely anchored, which fits all of our empirical results"--Federal Reserve Board web site.
Notes: Includes bibliographical references.
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