Measuring the long-term perception of monetary policy and the term structure

This paper has two objectives. The first is to identify the long-term public perception of monetary policy. The second is to identify the relationship between this perception and long-term bond rates. For German data, the use of a two-factor model of the term structure results in the best forecast of long-term interest rates for the period between January 1975 and January 2003. It also allows us to introduce as the second factor the long-term perception of inflation as a characteristic of the behaviour of monetary authorities.