Tests of the expectations hypothesis and policy reaction to the term spread: some comparative evidence
Boero, Gianna and Torricelli, Costanza (1998) Tests of the expectations hypothesis and policy reaction to the term spread: some comparative evidence. Working Paper. University of Warwick, Department of Economics, Coventry.
WRAP_Boero_512_twerp10.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
The aim of this paper is to evaluate the impact of monetary policy in tests of the Expectations Hypothesis of the term structure of interest rates. We apply the model developed by McCallum (1994b), in which the Expectations Hypothesis interacts with a policy reaction function and with a time-varying term premium, to eight countries with different monetary policy stances, within the period 1985 to 1995. The results suggest the importance of the treatment of monetary policy in explaining the empirical performance of the Expectations Hypothesis. Amongst other results, we also find that the model performs better for some countries than others depending upon the monetary policy stance adopted.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Rational expectations (Economic theory), Interest rates, Monetary policy, Economics -- Mathematical models|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Number of Pages:||28|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Consiglio nazionale delle ricerche (Italy) (CNR)|
|Grant number:||CNR97.01050.CT10 (CNR), CNR97.01211.CT10 (CNR)|
|References:||Bekaert, Hodrick and Marshall, 1997, On biases in tests of the expectations hypothesis of the term structure of interest rates, Journal of Financial Economics, 44, 309-348. Boero G., F. Madjlessi F. and C. Torricelli, 1996, The information in the term structure of German interest rates, Proceedings of the VI International AFIR Colloquium, Nürnberg, October 1996, VVW Karlsruhe. Boero G. and C.Torricelli, 1997, The Expectations Hypothesis of the term structure of interest rates: evidence for Germany, Contributi di ricerca CRENOS, n. 4, Università di Cagliari, settembre. Campbell J.Y. and R.J. Shiller, 1991, Yield spread and interest rate movements: a bird’s eyes view, Review of Economic Studies, 58, 495-514. Dotsey M. and C. Otrok, 1995, The rational expectation hypothesis of the term structure, monetary policy and time-varying term premia, Economic Quarterly, Federal Reserve Bank of Richmond, 81, 65-81. Engsted, T. and C. Tanggaard, 1995, The predictive power of yield spreads for future interest rates: Evidence from the Danish term structure, Scandinavian Journal of Economics, 97, 145-159. Evans M.D.D. and K.K. Lewis, 1994, Do stationary risk premia explain it all? - Evidence from the term structure, Journal of Monetary Economics, 33, 285-318. Gerlach, S. and F. Smets, 1997, The Term Structure of Euro-rates: some evidence in support of the expectations hypothesis, Journal of International Money and Finance, Vol. 16, no. 2, 285-303. Hsu C. and P.Kugler, 1997, The revival of the Expectations Hypothesis of the US term structure of interest rates, Economics Letters, 55, 115-120. Kugler, P., 1990, The term structure of interest rates and rational expectations, Journal of International Money and Finance, Vol. 9, pp. 234-244. Kugler P., 1997, Central Bank policy reaction and the Expectation Hypothesis of term structure, International Journal of Finance and Economics,2, 217-224. Malaguti L. and C. Torricelli, 1997, The interaction between monetary policy and the Expectation Hypothesis of the term structure of interest rates in a N-period Rational Expectation model, Materiali di Discussione, n.181, Dipartimento di Economia Politica, Università di Modena, luglio. Mankiw N.G. and J.A..Miron, 1986, The changing behaviour of the term structure of interest rates, Quarterly Journal of Economics, 101, 211-228. McCallum B.T., 1983, On non-uniqueness in rational expectations models: an attempt at perspective, Journal of Monetary Economics, 11, 139-168. McCallum B.T., 1994a, A reconsideration of the Uncovered Interest Rate Parity Relationship, Journal of Monetary Economics, 33, 105-132. McCallum B.T., 1994b, Monetary policy and the term structure of interest rates, NBER Working Paper Series, N. 4938. Rudebusch G.D., 1995, Federal Reserve interest rate targeting, rational expectations, and the term structure, Journal of Monetary Economics, 35, 245-274. Schotman P.C., 1997, Small sample properties of the regression test of the expectations model of the term structure, Economics Letters, 54, 129-134 Simon, D.P., 1989, Expectations and risk in the Treasury bill market: An instrumental variables approach, Journal of Financial and Quantitative Analysis, 24, 357-365. Tzavalis E. and M.R. Wickens, 1997, Explaining the failures of the Term Spread Models of the Rational Expectations Hypothesis of the Term Structure, Journal of Money, Credit and Banking, Vol. 29, No. 3, 364-380.|
Actions (login required)