Was There a "Peso Problem" in the U.S. Term Structure of Interest Rates: 1979-1982?

Karen Lewis

International Economic Review, 1991, vol. 32, issue 1, 159-73

Abstract: During the period following October 1979 through 1982, the U.S. Federal Reserve allowed interest rates to fluctuate widely, in contrast to its previous policy of targeting these rates in the 1970s. The policy was abandoned in 1982 in favor of an operating procedure that reduced the variation in interest rates. This paper implements an estimation method to identify, from the term structure of Eurodollar returns, the market's beliefs that the Federal Reserve may revert to interest rate targeting. The model is not rejected and gives plausible estimates of the probability of a switch in monetary regimes. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1991
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