ECONOMIC THEORY, DOMESTIC POLICIES AND LONG-RATES: 1994, A CASE STUDY

Economic fundamentals-such as economic growth, inflationary expectations, and monetary policy-cannot explain the worldwide rise in long-term interest rates during 1994. The present paper investigates the extent to which the rise in rates was consistent with economic theory and domestic policies. It finds that it is necessary to introduce institutional factors to account for the widespread nature of the rise and the extent of the rise as well as, for some countries, the fact that long rates rose at all.