A Simple Account of the Behavior of Long-Term Interest Rates

Robert Shiller and John Campbell

Scholarly Articles from Harvard University Department of Economics

Abstract: Recent empirical research on the term structure of interest rates has shown that the long-term interest rate is well described by a distributed lag on short-term interest rates, but does not conform to the expectations theory of the term structure. It has been suggested that the long rate "overreacts" to the short rate. This paper presents aunified taxonomy of risk premia, or deviations from the expectations theory. This enables the hypothesis of overreaction to be formally stated. It is shown that, if anything, the long rate has underreacted to the short rate. However, the independent movement of the long rate is primarily responsible for the failure of the expectations theory.

Date: 1984
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Published in American Economic Review

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Journal Article: A Simple Account of the Behavior of Long-Term Interest Rates (1984)
Working Paper: A Simple Account of the Behavior of Long-Term Interest Rates (1983)
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