Multifactor Keynesian models of the long-term interest rate

Tanweer Akram

Applied Economics Letters, 2023, vol. 30, issue 9, 1222-1227

Abstract: This paper presents multifactor Keynesian models of the long-term interest rate. In recent years, there have been a proliferation of empirical studies based on the Keynesian approach to interest rate modelling. These studies evince the connection between the long-term interest rate and the short-term interest rate. However, standard multifactor models of the long-term interest rate in quantitative finance have not been yet incorporated Keynes’s insights about interest rate dynamics. Keynes’s insights are introduced in two different multifactor models of the long-term interest rate to illustrate how the long-term interest rate relates to the short-term interest rate, after controlling for the central bank’s policy rate, expected inflation, the central bank’s inflation target, volatility in financial markets, and Wiener processes.

Date: 2023
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DOI: 10.1080/13504851.2022.2041174

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