Expectations and Risk Premia in the Determination of Long-Term Interest Rates in Ireland

The role of expectations in influencing long-term interest rates in Ireland is examined. In the case of long-term securities, interest rate risk is added to exchange rate risk as a barrier to arbitrage between yields at home and abroad. Nevertheless, we find that fluctuations in world interest rates seem to have a strong influence on Irish long rates. Domestic influences are also undoubtedly important, but cannot easily and reliably be modeled in terms of either rational expectations of short rates or inflation, or by reference to quantifiable indicators of confidence such as current inflation differentials or government borrowing.