Monetary Policy and the Term Structure of Interest Rates

28 Pages Posted: 21 Jul 2000 Last revised: 1 Jul 2010

See all articles by Bennett T. McCallum

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

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Date Written: November 1994

Abstract

This paper addresses a prominent empirical failure of the expectations theory of the term structure of interest rates under the assumption of rational expectations. This failure concerns the magnitude of slope coefficients in regressions of short rate (or long- rate) changes on long-short spreads. It is shown that the anomalous empirical findings can be rationalized with the expectations theory by recognition of an exogenous random (but possibly autoregressive) term premium plus the assumption that monetary policy involves smoothing of an interest rate instrument -- the short rate -- together with the responses to the prevailing level of the spread.

Suggested Citation

McCallum, Bennett T., Monetary Policy and the Term Structure of Interest Rates (November 1994). NBER Working Paper No. w4938. Available at SSRN: https://ssrn.com/abstract=226538

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