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The response of long-term interest rates to news about monetary policy actions: Empirical evidence for the U.S. and Germany

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  • Dieter Nautz
  • Jürgen Wolters

Abstract

We reexamine the expectations theory of the term structure focusing on the question how monetary policy actions indicated by changes in the very short rate affect long-term interest rates. Our main point is that the expectations hypothesis implies that very long rates should only react to unanticipated changes of the very short rate. In contrast to cointegration tests of expectations theory this implication only requires rational expectations but not stationary risk premia. Therefore, its empirical test sheds new light on the importance of expectations theory for the determinants of the term structure of interest rates. --

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Bibliographic Info

Article provided by Springer in its journal Weltwirtschaftliches Archiv.

Volume (Year): 135 (1999)
Issue (Month): 3 (September)
Pages: 397-412

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Handle: RePEc:spr:weltar:v:135:y:1999:i:3:p:397-412

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Keywords: O40; D81; E62;

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  1. Nautz, Dieter, 1998. "Banks' demand for reserves when future monetary policy is uncertain," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 161-183, June.
  2. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722 Elsevier.
  3. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  4. Phillips, P C B, 1991. "Optimal Inference in Cointegrated Systems," Econometrica, Econometric Society, vol. 59(2), pages 283-306, March.
  5. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
  6. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
  7. Cuthbertson, Keith, 1996. "The Expectations Hypothesis of the Term Structure: The UK Interbank Market," Economic Journal, Royal Economic Society, vol. 106(436), pages 578-92, May.
  8. Evans, Martin D. D. & Lewis, Karen K., 1994. "Do stationary risk premia explain it all?: Evidence from the term structure," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 285-318, April.
  9. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  10. Froot, Kenneth A, 1989. " New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 44(2), pages 283-305, June.
  11. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  12. Tzavalis, Elias & Wickens, Michael R, 1997. "Explaining the Failures of the Term Spread Models of the Rational Expectations Hypothesis of the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 364-80, August.
  13. Engsted, Tom & Tanggaard, Carsten, 1994. "Cointegration and the US term structure," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 167-181, January.
  14. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  15. Mitusch, Kay & Nautz, Dieter, 2001. "Interest rate and liquidity risk management and the European money supply process," Journal of Banking & Finance, Elsevier, vol. 25(11), pages 2089-2101, November.
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Cited by:
  1. Boris Hofmann, 2006. "EMU and the transmission of monetary policy: evidence from business lending rates," Empirica, Springer, vol. 33(4), pages 209-229, September.
  2. Holtemöller, Oliver, 2002. "Further VAR evidence for the effectiveness of a credit channel in Germany," SFB 373 Discussion Papers 2002,66, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  3. Jaenicke, Johannes, 2001. "Price and hedging policy: The case of an intertemporarily risk averse bank," Economics Letters, Elsevier, vol. 71(3), pages 391-396, June.

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