Switching Regimes in the Term Structure of Interest Rates during U.S. Post-War: A Case for the Lucas Proof Equilibrium?
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Jesús Vázquez
Farmer (1991) suggests that in a model in which there are multiple rational expectations (RE) equilibria agents may find it useful to coordinate their expectations in a unique RE equilibrium which is immune to the Lucas Critique. In this paper, we evaluate Lucas proof (LP) equilibrium performance in the context of the term structure of interest rates model by using post-war US data. Estimation results show that LP equilibrium exhibits some important features of the data that are not reproduced by the fundamental equilibrium. For instance, the short rate behaves as a random walk in a regime characterized by low conditional volatility, whereas the term spread Granger-causes changes in the short-rate in periods characterized by high conditional volatility.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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- Private Information and High-Frequency Stochastic Volatility
- The ARAR Error Model for Univariate Time Series and Distributed Lag
- Inferring the Forward Looking Equity Risk Premium from Derivative Prices
- An Investigation of Current Account Solvency in Latin America Using Non Linear Nonstationarity Tests
- Switching Regimes in the Term Structure of Interest Rates during U.S. Post-War: A Case for the Lucas Proof Equilibrium?
Articles in the same Issue
- Article
- Private Information and High-Frequency Stochastic Volatility
- The ARAR Error Model for Univariate Time Series and Distributed Lag
- Inferring the Forward Looking Equity Risk Premium from Derivative Prices
- An Investigation of Current Account Solvency in Latin America Using Non Linear Nonstationarity Tests
- Switching Regimes in the Term Structure of Interest Rates during U.S. Post-War: A Case for the Lucas Proof Equilibrium?
