Federal Reserve Bank of San Francisco
Working Papers in Applied Economic Theory
Federal Reserve interest rate targeting, rational expectations, and the term structure
The amount of information in the yield curve for forecasting future changes in short rates varies with the maturity of the rates involved. Indeed, spreads between certain long and short rates appear unrelated to future changes in the short rate--contrary to the rational expectations hypothesis of the term structure. This paper estimates a daily model of Federal Reserve interest rate targeting behavior, which, accompanied by the maintained hypothesis of rational expectations, explains the varying predictive ability of the yield curve and elucidates the link between Fed policy and the term structure.
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Glenn D. Rudebusch, Federal Reserve interest rate targeting, rational expectations, and the term structure, Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco, 1995.
Keywords: Rational expectations (Economic theory) ; Monetary policy - United States ; Interest rates
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