An Error-Correction Model of the Long-Term Bond Rate

An equation explaining the long-run behavior of the bond rate from 1971 to 1993 indicates that inflation is the main long-run economic determinant of the bond rate. Monetary policy actions have short-run but no long-run effects on the rate. During the subperiod 1979 to 1993, however, some episodes of large, short-run upswings in the rate remain unpredicted. Perhaps they reflect inflation scares as in Goodfriend (1993).