Conventional Valuation and the Term Structure of Interest Rates

45 Pages Posted: 7 Apr 2004 Last revised: 27 Nov 2022

See all articles by Robert J. Shiller

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

Date Written: April 1985

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.

Suggested Citation

Shiller, Robert J., Conventional Valuation and the Term Structure of Interest Rates (April 1985). NBER Working Paper No. w1610, Available at SSRN: https://ssrn.com/abstract=336340

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