NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Conventional Valuation and the Term Structure of Interest Rates

Robert J. Shiller

NBER Working Paper No. 1610
Issued in April 1985
NBER Program(s):   ME

There does not appear to be a general tendency for long-term interest rates either to overreact or to underreact to short-term interest rates relative to a rational expectations model of the term structure. Rather, there appears to be some tendency for markets to set long-term interest rates in terms of a convention or rule of thumb that makes long rates behave as a distributed lag, with gradually declining coefficients, of short-term interest rates. People seem to remember the recent past but blur the mare distant. In some monetary policy regimes this convention implies overreaction, in others underreaction.

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Document Object Identifier (DOI): 10.3386/w1610

Published: Rudiger Dornbusch et. al. eds., Macroeconomics and Finance: Essays in Honor of Franco Modigliani, Cambridge, MIT Press, 1987

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