Working Paper: NBER ID: w1345
Authors: N. Gregory Mankiw; Lawrence H. Summers
Abstract: This paper examines the hypothesis that financial markets are myopic by studying the term structure of interest rates. White rejecting decisively the traditional expectations hypothesis regarding the term structure, our statistical results also lead us to conclude that long term interest rates do not overreact to either the level or the change in short termrates. This finding suggests that participants in bond markets are not myopic or overly sensitive to recent events. Our statistical results also suggest that most variations in the yield curve reflect changes in liquidity premia rather than expected changes in interest rates.
Keywords: interest rates; term structure; monetary policy
JEL Codes: E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-term interest rates (E43) | long-term interest rates (E43) |
| liquidity premia (E41) | yield curve variations (E43) |
| expectations hypothesis (D84) | long-term interest rates (E43) |
| current short rates (E43) | long-term yields (E43) |