The excess sensitivity of long-term interest rates: evidence and implications for macroeconomic models

By R. Gürkaynak, Brian P. Sack, Eric T. Swanson. 2003

134 citations recorded by the source corpus.

This paper demonstrates that long-term forward interest rates in the U.S. often react considerably to surprises in macroeconomic data releases and monetary policy announcements. This behavior is inconsistent with the assumption of many macroeconomic models that the long-run properties of the economy are time-invariant and perfectly known by all economic agents. Under those conditions, the shocks we consider would have only transitory effects on short-term interest rates, and hence would not generate large responses in forward rates. Our empirical findings suggest that private agents adjust their expectations of the long-run inflation rate in response to macroeconomic and monetary policy surprises. Consistent with our hypothesis, forward rates derived from inflation-indexed Treasury debt show little sensitivity to these shocks, indicating that the response of nominal forward rates is mostly driven by inflation compensation. In addition, we find that in the U.K., where the long-run inflation target is known by the private sector, long-term forward rates have not demonstrated excess sensitivity since the Bank of England achieved independence in mid-1997. We present an alternative model in which agents' perceptions of long-run inflation are not completely anchored, which fits all of our empirical results.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/07d852c9e1e6eb54d1eab15f076ba392658687df

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In Economics and Econometrics

Citations in the corpus

Explicit Inflation Objectives and Macroeconomic Outcomes (2004, methodology): “For these economies, we analyze the behavior of medium- and long-term inflation expectations using Consensus Economics’ semiannual surveys of market forecasters, and we employ the methods of Stock (1991) and Hansen (1999) to obtain median-unbiased measures of persistence for total and core consumer ”
Inflation Targeting in the United States (2003, unknown): “Gurkaynak, Sack, and Swanson (2003) present evidence indicating that the Bank of England’s credible commitment to an inflation target helped to anchor long-term inflation expectations and bond rates in the United Kingdom.”
A MACRO-FINANCE MODEL OF THE TERM STRUCTURE, MONETARY POLICY AND THE ECONOMY* (2003, unknown): “In the macro-finance model, the first is a perceived shift in the inflation target or level factor.(25) The first column displays the impulse responses to such a level shock, which increases the inflation target by 34 basis points–essentially on a permanent basis.”
The Macroeconomic Effects of Inflation Targeting (2004, background): “3 In related work, Gurkaynak, Sack, and Swanson (2003) find evidence that shifts in private-market perceptions about long-term inflation account for a substantial proportion of the degree to which U.S. longterm bond rates are highly sensitive to federal funds rate surprises.”
Do actions speak louder than words? the response of asset prices to monetary policy actions and statements (2004, background): “This is consistent with the findings of Gürkaynak, Sack, and Swanson (2003) that far-ahead forward rates typically move inversely with the monetary policy surprise, although our estimates here are not highly statistically significant, partly because we cannot compute intraday forward rate changes…”