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It has recently been suggested that allowing for switches between different inflationary regimes produces a much better fit for the Fisher relationship between interest rates and inflation, at least for U.S. data. The paper assesses the merits of the regime-switching theory as an explanation for the apparent fluctuations in real interest rates in Australia, Canada, Germany, the United Kingdom, and the United States.
Banks and Banking --- Inflation --- Interest Rates: Determination, Term Structure, and Effects --- Price Level --- Deflation --- Finance --- Macroeconomics --- Real interest rates --- Long term interest rates --- Short term interest rates --- Yield curve --- Financial services --- Prices --- Interest rates --- United States
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This paper assesses the relative importance of alternative explanations for the rise in long-term interest rates in the United States from October 1993 to April 1994. Standard econometric models of the term structure are shown to have a structural break in the early 1980s. An important reason for this change in the traditional term structure relationship appears to be an increase in the responsiveness of long-term rates to changes in the stance of monetary policy. Augmented term structure models that explicitly incorporate the role of monetary policy in determining the level of long-term rates are then constructed. These models track variations in the long-term rate better than traditional term structure models, but still leave a significant fraction of the recent increase in long-term rates unexplained.
Banks and Banking --- Money and Monetary Policy --- Interest Rates: Determination, Term Structure, and Effects --- Monetary Policy --- Finance --- Monetary economics --- Long term interest rates --- Short term interest rates --- Monetary tightening --- Yield curve --- Monetary stance --- Financial services --- Monetary policy --- Interest rates --- United States
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The development and use of forward-looking macro models in policymaking institutions has proceeded at a pace much slower than predicted in the early 1980s. An important reason is that researchers have not had access to robust and efficient solution techniques for solving nonlinear forward-looking models. This paper discusses the properties of a new algorithm that is used for solving MULTIMOD, the IMF’s multicountry model of the world economy. This algorithm is considerably faster and much less prone to simulation failures than to traditional algorithms and can also be used to solve individual country models of the same size.
Banks and Banking --- Computational Techniques --- Computer Programs: Other Computer Software --- Currency --- Data Collection and Data Estimation Methodology --- Economic theory & philosophy --- Economic Theory --- Economic theory --- Exchange rates --- Expectations --- Finance --- Financial services --- Foreign Exchange --- Foreign exchange --- General Aggregative Models: Forecasting and Simulation --- Interest rates --- Interest Rates: Determination, Term Structure, and Effects --- Long term interest rates --- Rational expectations --- Short term interest rates --- Speculations --- United States
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Using data on long-term interest rates for 17 industrial countries, this paper develops some simple measures of monetary policy credibility and then tests if such measures improve the out-of-sample forecasts of conventional models of the inflation-unemployment process. The results provide some evidence in favor of the Lucas critique by showing that the short-run unemployment-inflation trade-off tends to improve in countries that are successful in providing low and stable inflation.
Banks and Banking --- Inflation --- Labor --- Money and Monetary Policy --- Model Construction and Estimation --- Price Level --- Deflation --- Monetary Policy --- Interest Rates: Determination, Term Structure, and Effects --- Unemployment: Models, Duration, Incidence, and Job Search --- Macroeconomics --- Finance --- Labour --- income economics --- Monetary economics --- Unemployment --- Real interest rates --- Long term interest rates --- Inflation targeting --- Prices --- Financial services --- Monetary policy --- Interest rates --- United Kingdom --- Income economics
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The existence of a well-specified and stable relationship between money and prices has long been perceived as a prerequisite for the use of monetary aggregates in the conduct of monetary policy. This paper contributes to the ongoing discussion about the stability of euro area money demand by constructing an own rate of return on euro area M3 and by analyzing its implications in a standard money demand system. Over the sample period, one cointegrating vector relating real M3, real GDP and the spread between the short-term interest rate and the own rate of M3 can be identified and interpreted as a long-run euro area money demand equation. A dynamic money demand system is subsequently estimated. Standard diagnostics stability tests and out-of-sample forecasts confirm the good statistical performance of the model.
Banks and Banking --- Money and Monetary Policy --- Time-Series Models --- Dynamic Quantile Regressions --- Dynamic Treatment Effect Models --- Diffusion Processes --- State Space Models --- Demand for Money --- Interest Rates: Determination, Term Structure, and Effects --- Finance --- Monetary economics --- Demand for money --- Short term interest rates --- Market interest rates --- Long term interest rates --- Yield curve --- Money --- Financial services --- Interest rates --- Germany
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This paper investigates international co-movement in bond yields by testing for uncovered interest parity (UIP). Existing work is supplemented by focusing on long instead of short-term interest rates and by employing exchange rate expectations derived from purchasing power parity (PPP) instead of actual outcomes. Among the major currencies during 1975-97, the paper does not find a further increase in co-movement beyond that associated with the wave of financial market liberalization in the early 1980s. Given the similarity between PPP-based UIP tests and those employing actual exchange rate outcomes, the value added of the former lies mainly with data availability.
Banks and Banking --- Foreign Exchange --- Investments: General --- Interest Rates: Determination, Term Structure, and Effects --- Financial Markets and the Macroeconomy --- Investment --- Capital --- Intangible Capital --- Capacity --- Finance --- Currency --- Foreign exchange --- Macroeconomics --- Long term interest rates --- Exchange rates --- Yield curve --- Interest rate parity --- Return on investment --- Financial services --- National accounts --- Interest rates --- Saving and investment --- United States
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This paper reviews the first five years’ experience with inflation targeting in the United Kingdom. It concludes that inflation performance was not significantly different under inflation targeting than predicted by a VAR model estimated in the period prior to participation in the exchange rate mechanism (ERM). Both short- and long-term interest rates were lower than predicted, however, which is consistent with the interpretation that some gains in credibility were achieved under the inflation targeting regime.
Banks and Banking --- Econometrics --- Inflation --- Money and Monetary Policy --- Monetary Policy --- Price Level --- Deflation --- Interest Rates: Determination, Term Structure, and Effects --- Time-Series Models --- Dynamic Quantile Regressions --- Dynamic Treatment Effect Models --- Diffusion Processes --- Monetary economics --- Macroeconomics --- Finance --- Econometrics & economic statistics --- Inflation targeting --- Long term interest rates --- Short term interest rates --- Vector autoregression --- Monetary policy --- Prices --- Financial services --- Econometric analysis --- Interest rates --- United Kingdom
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This paper empirically examines the long-run relationship between real exchange rates and real interest rate differentials over the recent floating exchange rate period, using a panel cointegration method, with data for a set of industrialized countries. The paper finds evidence of statistically significant long-run relationships and plausible point estimates, which contrasts with much existing evidence. The failure of others to establish such relationships may reflect the estimation method they use rather than any inherent deficiency of the fundamentals-based models.
Banks and Banking --- Foreign Exchange --- Money and Monetary Policy --- Interest Rates: Determination, Term Structure, and Effects --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Currency --- Foreign exchange --- Finance --- Monetary economics --- Real exchange rates --- Real interest rates --- Exchange rates --- Long term interest rates --- Currencies --- Financial services --- Money --- Interest rates --- Australia
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This paper examines the impact of central bank communication on market expectations of monetary policy and long-term interest rates by comparing Federal Open Market Committee (FOMC) action dates when a policy statement was made to dates before statements were issued. Increased communication has been associated with a reduction in the magnitude of short-term monetary surprises; a greater flow of information about the long-term path of policy that is distinct from the short-term surprise; and a larger role for these long-term surprises in the determination of long-term interest rates.
Banks and Banking --- Investments: Futures --- Macroeconomics --- Interest Rates: Determination, Term Structure, and Effects --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Price Level --- Inflation --- Deflation --- Finance --- Futures --- Market interest rates --- Long term interest rates --- Asset prices --- Short term interest rates --- Interest rates --- Derivative securities --- Prices --- United States --- Banks and banking, Central. --- Monetary policy. --- Economic forecasting --- Econometric models.
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This paper empirically evaluates the validity of the term structure of interest rates in a low-interest-rate environment. Applying a time-series method to high-frequency Japanese data, the term-structure model is found to be useful for economic analysis only when interest rates are high. When interest rates are low, the usefulness of the model declines, since the interest spread contains little information that can be used for predicting future economic activity. The term-structure relationship is also weakened by the Bank of Japan's use of interest rate smoothing.
Monetary policy --- Interest rates --- Money market rates --- Rate of interest --- Rates, Interest --- Interest --- Banks and Banking --- Econometrics --- Demand for Money --- Monetary Policy --- Interest Rates: Determination, Term Structure, and Effects --- Estimation --- Finance --- Econometrics & economic statistics --- Short term interest rates --- Long term interest rates --- Yield curve --- Estimation techniques --- Zero lower bound --- Financial services --- Econometric analysis --- Econometric models --- Japan
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