On the Relationship Between Short‐ and Long‐term Interest Rates

Teruyoshi Kobayashi

International Finance, 2004, vol. 7, issue 2, 261-286

Abstract: This paper addresses issues regarding the relationship between short‐ and long‐term interest rates. In the real world, an expansionary (contractionary) policy is normally followed by a fall (rise) in long‐term rates. However, there exist exceptional cases in which short‐ and long‐term rates move in opposite directions. This paper attempts to provide a formal explanation for such unusual phenomena using a variety of new Keynesian models. It turns out that the simultaneous occurrence of different economic shocks, to which the central bank should react, can explain this behaviour of long rates.

Date: 2004
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https://doi.org/10.1111/j.1367-0271.2004.00138.x

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