Expectations, Surprises and Treasury Bill Rates: 1960-82
Changes in six-month bill rates over semiannual periods in the 1960s and 1970s are successfully related to expected changes and to surprises. The latter include unanticipated changes in expected inflation, in the growth of industrial production and base money, and in inflation uncertainty. Estimation of the basic equation through the middle of 1983 does not suggest anychange in structure. Moreover the equation "explains" 60 percent of the extraordinarily high level of real rates since late 1980, largely owing to an excess of unexpected net increases in anticipated inflation over actualin creases. Our estimates provide some support for the expectations theory; there appears to be information content in six-month forward rates. While this content is swamped by the impact of surprises in equations explaining rate changes in terms of forward rates alone, the content is clear when proxies for the surprises are included in the equations.
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3/4 percentage points Alan Alex Kane analysis anticipated inflation Author Title Date average base money basis points bill rate rises Bureau of Economic business investment Capital change in rate changes in expected changes in inflation changes in interest credit controls December l980 early l980s Economic Research equation l.2 estimation equation expectations theory expected changes expected inflation expected rate greater than zero increase in inflation increases in anticipated industrial production inflation uncertainty June and December l-t l-t l-t Levi and Makin Livingston survey Makin and Tanzi Massachusetts Avenue middle of l983 Model monetary growth Monetary Policy National Bureau NBER NBER WORKING PAPER nominal rates observed Ohio State University output Patric H percent point increase raised the bill rate rose real bill rate real interest rate real rate real six-month bill semiannual periods six-month bill rate Steven Shavell structural SURPRISES AND TREASURY tax rate TREASURY BILL RATES U.xx unanticipated increases unexpected increases variables