The October 1979 Change in the Monetary Regime: its Impact on the "Forecastability" of Interest Rates

33 Pages Posted: 16 Jul 2004 Last revised: 17 Aug 2022

See all articles by James E. Pesando

James E. Pesando

University of Toronto; National Bureau of Economic Research (NBER)

Andre Plourde

Independent

Date Written: March 1986

Abstract

Subsequent to the October 1979 shift in monetary policy in the United States, interest rates in North America not only reached unprecedented levels,but also exhibited unprecedented volatility. This paper shows that the anticipated quarterly changes in long-term rates associated with the rational expectations model have remained small during this post-shift period. Recorded forecasts of long-term interest rates in Canada continue to prove inferior to the no-change prediction of the martingale model. The "perverse" relationship between the slope of the yield curve and the subsequent movementin long-term rates exists in the Canadian data, but is of only modest value in a forecasting context. The excess return on long-term bonds implicit in the recorded forecasts of the level of interest rates varies sharply, yet there is no evidence that forecasters have identified a predictable component of a time-varying term premium.

Suggested Citation

Pesando, James E. and Plourde, Andre, The October 1979 Change in the Monetary Regime: its Impact on the "Forecastability" of Interest Rates (March 1986). NBER Working Paper No. w1874, Available at SSRN: https://ssrn.com/abstract=341829

James E. Pesando (Contact Author)

University of Toronto ( email )

Department of Economics Institute for Policy Analysis
Toronto, Ontario M5S 3E6
Canada
(416)978-8625 (Phone)
(416)978-5519 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andre Plourde

Independent

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
27
Abstract Views
523
PlumX Metrics