Working Paper: NBER ID: w1874
Authors: James E. Pesando; Andre Plourde
Abstract: Subsequent to the October 1979 shift in monetary policy in the United States, interest rates in North America not only reached unprecedented levels,but also exhibited unprecedented volatility. This paper shows that the anticipated quarterly changes in long-term rates associated with the rational expectations model have remained small during this post-shift period. Recorded forecasts of long-term interest rates in Canada continue to prove inferior to the no-change prediction of the martingale model. The "perverse" relationship between the slope of the yield curve and the subsequent movementin long-term rates exists in the Canadian data, but is of only modest value in a forecasting context. The excess return on long-term bonds implicit in the recorded forecasts of the level of interest rates varies sharply, yet there is no evidence that forecasters have identified a predictable component of a time-varying term premium.
Keywords: Monetary Policy; Interest Rates; Forecasting
JEL Codes: E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| October 1979 monetary policy shift (E65) | interest rate forecastability (E47) |
| anticipated quarterly changes in longterm interest rates (E43) | nochange prediction (C59) |
| recorded forecasts of longterm rates (E43) | nochange prediction (C59) |
| time-varying term premium (C22) | forecasting context (C53) |
| slope of the yield curve (E43) | subsequent changes in longterm rates (E43) |