The Sensitivity of Long-Term Interest Rates to Economic News: Comment

19 Pages Posted: 2 Jul 2010 Last revised: 30 Jul 2010

See all articles by Michelle L. Barnes

Michelle L. Barnes

Federal Reserve Bank of Boston

N. Aaron Pancost

University of Texas at Austin McCombs School of Business

Date Written: July 26, 2010

Abstract

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

Barnes, Michelle L. and Pancost, N. Aaron, The Sensitivity of Long-Term Interest Rates to Economic News: Comment (July 26, 2010). FRB of Boston Working Paper No. 10-7. Available at SSRN: https://ssrn.com/abstract=1633934 or http://dx.doi.org/10.2139/ssrn.1633934

Michelle L. Barnes (Contact Author)

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

N. Aaron Pancost

University of Texas at Austin McCombs School of Business ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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