A simple model of the long-term interest rate. Issue 1 (2nd January 2022)

• Record Type: Journal Article
• Authors: Akram, Tanweer
• Is Part Of: Journal of post Keynesian economics. Volume 45:Issue 1(2022)
• Page Start: 130
• Page End: 144
• Publication Date: 2022-01-02
• Subjects: Bond yields -- Keynes -- long-term interest rate -- monetary policy -- short-term interest rate; E12 -- E43 -- E50 -- E58 -- E60 -- G10 -- G12 -- G41; 330.15
• DOI: 10.1080/01603477.2021.1878906
• Languages: English
• ISSNs: 0160-3477

Abstract

Abstract: This paper presents a simple model of the long-term interest rate. The model represents Keynes's conjecture that the central bank's actions influence the long-term interest rate primarily through the short-term interest rate, while allowing for other important factors. It relies on the geometric Brownian motion to formally model Keynes's conjecture. Geometric Brownian motion has been widely used in modeling interest rate dynamics in quantitative finance. However, it has not been used to represent Keynes's conjecture. Empirical studies in support of the Keynesian perspective and the stylized facts on the dynamics of the long-term interest rate on government bonds suggest that interest rate models based on Keynes's conjecture can be advantageous.