Do the Interest Rates Adjust Asymmetrically across Business Cycles?

Abstract

Since the late nineties, literature devoted to the term structure of interest rates suggests that the dynamics of interest rate spread might be well described by nonlinear models. This paper examines this possibility for U.S. long-term and short-term interest rates between 1962M1 and 2015M11 by employing the Markov-switching VEC model, which allows for the asymmetric adjustment of interest rates to the long run equilibrium across regimes. Our results support the long-term interest rate adjusts asymmetrically towards the long run equilibrium in different regimes. Besides, our findings point to the regimes identified from the term structure of interest rate by MS-VEC model is closely related to the business cycle dating by the NBER.