Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates

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Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates

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Title: Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates
Author: Friedman, Benjamin Morton
Citation: Friedman, Benjamin Morton. 1977. Financial flow variables and the short-run determination of long-term interest rates. Journal of Political Economy 85(4): 661-689.
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Abstract: Because transactions costs are smaller for allocating new cash flows than for reallocating existing asset holdings, financial flow variables are important determinants of investors' short-run asset demands. The demand-for-bonds equations implied by the resulting "optimal marginal adjustment" model of portfolio behavior constitute the demand side of a structural supply-demand model of the determination of the long-term interest rate. Empirical results, based on demand-for-bonds equations estimated using U.S. data for six major categories of bond market investors, support the optimal marginal adjustment model and show that the associated structural model of interest rate determination, which is restricted by the underlying demand-for-bonds equations, fits the data about as well as do previously developed unrestricted reduced-form term-structure equations.
Published Version: doi:10.1086/260595
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:4554309
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