Monetary Policy and the Term Structure of Interest Rates [report]

Bennett McCallum
1994 unpublished
This paper addresses a prominent empirical failure of the expectations theory of the temi smicture of interest rates under the assumption of rational expectations. This failure concerns tL magnitude of slope coefficients in regressions of short rate (or long-rate) changes on longshort spreads. It is shown that the anomalous empirical findings can be rationalized with the expectations theory by recognition of an exogenous random (but possibly autoregressive) term premium plus the assumption that
more » ... monetary policy involves smoothing of an interest rate instrument -the short rate -together with the responses to the prevailing level of the spread.
doi:10.3386/w4938 fatcat:iu53clsq5ncx3bgnalehdesnh4