The Changing Behavior of the Term Structure of Interest Rates

38 Pages Posted: 6 Jul 2004 Last revised: 26 Jul 2010

See all articles by N. Gregory Mankiw

N. Gregory Mankiw

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

Jeffrey A. Miron

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

Date Written: July 1985

Abstract

We reexamine the expectations theory of the term structure using data at the short end of the maturity spectrum. We find that prior to the founding ofthe Federal Reserve System in 1915, the spread between long rates and short rates has substantial predictive power for the path of interest rates; after 1915, however, the spread contains much less predictive power. We then show that the short rate is approximately a random walk after the founding of the Fed but not before. This latter fact, coupled with even slight variation inthe term premium, can explain the observed change in 1915 in the performance of the expectations theory. We suggest that the random walk character of the short rate may be attributable to the Federal Reserve's commitment to stabilizing interest rates.

Suggested Citation

Mankiw, N. Gregory and Miron, Jeffrey A., The Changing Behavior of the Term Structure of Interest Rates (July 1985). NBER Working Paper No. w1669. Available at SSRN: https://ssrn.com/abstract=227200

N. Gregory Mankiw (Contact Author)

Harvard University - Department of Economics ( email )

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Jeffrey A. Miron

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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