Permanent Structural Change In The US Short-Term And Long-Term Interest Rates

This paper uses a time-varying error correction model to examine the structural changes in the rate of adjustment to the long-run equilibrium and the co integrating vector of the US short- and long-term interest rates. The authors show that agents' expectations of interest rate movements vary according to policy changes as reflected by changes in the direction of movements of the underlying parameters. The expectations hypothesis of the term structure of interest rates (Fisher (1930)), which states that the observed term structure can be used to infer market participants' expectations about future interest rates, has been viewed as pertinent to assessing the impact of monetary policy, its transmission mechanism and to pro-vide information about expectations of participants in financial markets.