Do Long-Term Interest Rates Overreact to Short-Term Interest Rates?

33 Pages Posted: 27 Apr 2000 Last revised: 6 Sep 2010

See all articles by N. Gregory Mankiw

N. Gregory Mankiw

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: May 1984

Abstract

This paper examines the hypothesis that financial markets are myopic by studying the term structure of interest rates. White rejecting decisively the traditional expectations hypothesis regarding the term structure, our statistical results also lead us to conclude that long term interest rates do not overreact to either the level or the change in short termrates. This finding suggests that participants in bond markets are not myopic or overly sensitive to recent events. Our statistical results also suggest that most variations in the yield curve reflect changes in liquidity premia rather than expected changes in interest rates.

Suggested Citation

Mankiw, N. Gregory and Summers, Lawrence H., Do Long-Term Interest Rates Overreact to Short-Term Interest Rates? (May 1984). NBER Working Paper No. w1345. Available at SSRN: https://ssrn.com/abstract=227151

N. Gregory Mankiw (Contact Author)

Harvard University - Department of Economics ( email )

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Lawrence H. Summers

Harvard University ( email )

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Harvard University - Harvard Kennedy School (HKS) ( email )

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