The Sensitivity of Long-Term Interest Rates to Economic News: Comment
19 Pages Posted: 2 Jul 2010 Last revised: 30 Jul 2010
Date Written: July 26, 2010
Refet Gürkaynak, Brian Sack, and Eric Swanson (2005) provide empirical evidence that long forward nominal rates are overly sensitive to monetary policy shocks, and that this is consistent with a model where long-term inflation expectations are not anchored because agents must infer the central bank's inflation target from noisy interest rate movements. Using the same data, methodology, and model, we show that their empirical results are neither persistent nor robust to small changes in sample period or methodology. In addition, their theoretical results rely mainly on an ad hoc law of motion for the inflation target - imperfect information about the target plays only a small role in un-anchoring expectations in their model.
Keywords: Inflation Targeting, Monetary Regime, Excess Sensitivity, Forward Rates
JEL Classification: E31, E42, E52, E58
Suggested Citation: Suggested Citation