England gained more operational independence and the long-term ináation target was known, the dynamics of the long-term forward rate was more stable. Orphanides andWilliams (2003) demonstrate also on a theoretical basis how the observed overreaction of long-term interest rates to the short-term interest rate could be explained by the presence of imperfect knowledge and a perpetual learning process by agents about the structure of the economy and the policymaker preferences. Hence, these two features increase the sensitivity of ináation expectations and of the termstructure of interest rates to temporary economic shocks. As shown by Orphanides andWilliams (2002), the imperfect knowledge is also responsible for the possible disconnection between the publicís.
