Working Paper: NBER ID: w1610
Authors: Robert J. Shiller
Abstract: There does not appear to be a general tendency for long-term interest rates either to overreact or to underreact to short-term interest rates relative to a rational expectations model of the term structure. Rather, there appears to be some tendency for markets to set long-term interest rates in terms of a convention or rule of thumb that makes long rates behave as a distributed lag, with gradually declining coefficients, of short-term interest rates. People seem to remember the recent past but blur the mare distant. In some monetary policy regimes this convention implies overreaction, in others underreaction.
Keywords: Interest Rates; Term Structure; Market Efficiency
JEL Codes: E43; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Recent short-term interest rates (E43) | Long-term interest rates (E43) |
| Past short-term interest rates (E43) | Long-term interest rates (E43) |
| Long-term interest rates (E43) | Psychological component (investor behavior) (G41) |
| Expectations theory of interest rates (E43) | Observed behavior of long-term rates (E43) |