THE CHANGING BEHAVIOR OF THE TERM STRUCTURE OF POST-WAR U.S. INTEREST RATES AND CHANGES IN THE FEDERAL RESERVE CHAIRMAN: IS THERE A LINK?

Using U.S. interest rate data covering the period 1950:1-1992:7, this paper tests the rational expectations model of the term structure of interest rates. We show evidence that the rational expectations model of the term structure is supported by the data during the seventies and a period lasting from the mid-eighties to the end of the sample. However, during the …fties, sixties and a period that covers most of the Volcker’s o¢ce term (from September 1979 to April 1986) the term structure model is rejected by the data. Moreover, we …nd evidence of regime changes in the short-term rate process and the term structure of interest rates. These regime switches roughly coincide with changes in the Federal Reserve chairman. The switches in monetary policy taking place when the chairmanship of the Federal Reserve changes therefore seem to play an important role in characterizing the term structure of interest rates.