The dynamics of the unobservable quot;shortquot; or quot;instantaneousquot; rate of interest are frequently estimated using a proxy. We show how the biases resulting from this practice (the quot;proxy problemquot;) are related to the derivatives of the proxy with respect to the short rate and...

The dynamics of the unobservable short rate are frequently estimated directly using a proxy. We examine the biases resulting from this practice (the quot;proxy problemquot;). Analytic results show that the proxy problem is not economically significant for single-factor affine models. In the...