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Exchange rate regimes and the expectations hypothesis of the term structure

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  • Stefan Gerlach
  • Frank Smets

    (European Central Bank (ECB))

Abstract

This paper uses weekly data on short-term eurorates for ten countries for the period 1979-96 to document that the ability of the expectations hypothesis (EH) to account for movements in the term structure is greater, and that short- term interest rates are more predictable, under fixed than under floating exchange rates. The paper also shows that the higher predictability does not arise solely because of monetary policy responses to speculative pressures in the foreign exchange markets: while it is more difficult to reject the EH in periods of exchange market turmoil, the EH is not rejected in tranquil periods.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 43.

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Length: 30 pages
Date of creation: Jul 1997
Date of revision:
Handle: RePEc:bis:biswps:43

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References

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  1. Kugler, Peter, 1988. "An Empirical Note on the Term Structure and Interest Rate Stabilization Policies," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(4), pages 789-92, November.
  2. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(2), pages 255-283, April.
  3. Lars E.O. Svensson, 1991. "Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the ERM 1979-1992," NBER Working Papers 3795, National Bureau of Economic Research, Inc.
  4. Gikas A. Hardouvelis, 1987. "The predictive power of the term structure during recent monetary regimes," Research Paper, Federal Reserve Bank of New York 8708, Federal Reserve Bank of New York.
  5. Dahlquist, Magnus & Jonsson, Gunnar, 1995. "The information in Swedish short-maturity forward rates," European Economic Review, Elsevier, Elsevier, vol. 39(6), pages 1115-1131, June.
  6. Jondeau, E. & Ricart, R., 1996. "The Expectation Theory: Tests on French, German, and American Euro-Rates," Working papers, Banque de France 35, Banque de France.
  7. Kugler, Peter, 1990. "The term structure of Euro interest rates and rational expectations," Journal of International Money and Finance, Elsevier, Elsevier, vol. 9(2), pages 234-244, June.
  8. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
  9. Stefan Gerlach, 1996. "Monetary policy and the behaviour of interest rates: are long rates excessively volatile?," BIS Working Papers, Bank for International Settlements 34, Bank for International Settlements.
  10. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(2), pages 211-28, May.
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Cited by:
  1. Nagayasu, Jun, 2002. "On the term structure of interest rates and inflation in Japan," Journal of Economics and Business, Elsevier, Elsevier, vol. 54(5), pages 505-523.
  2. Christian Mose Nielsen, 2007. "Does the choice of interest rate data matter for the results of tests of the expectations hypothesis - some results for the UK," Money Macro and Finance (MMF) Research Group Conference 2006, Money Macro and Finance Research Group 132, Money Macro and Finance Research Group.
  3. Jääskelä, Jarkko & Vilmunen, Jouko, 1999. "Anticipated Monetary Policy and the Dynamic Behaviour of the Term Structure of Interest Rates," Research Discussion Papers, Bank of Finland 12/1999, Bank of Finland.
  4. Alfred A. Haug & Pierre L. Siklos, 2002. "The Term Spread International Evidence of Non-Linear Adjustment," Working Papers, York University, Department of Economics 2002_08, York University, Department of Economics, revised Jul 2004.
  5. David S. Bates, 1999. "Financial Markets' Assessment of EMU," NBER Working Papers 6874, National Bureau of Economic Research, Inc.
  6. Nakaota, Hiroshi, 2005. "The term structure of interest rates in Japan: the predictability of economic activity," Japan and the World Economy, Elsevier, Elsevier, vol. 17(3), pages 311-326, August.
  7. Petra Gerlach-Kristen, 2007. "Three aspects of the Swiss term structure: an empirical survey," Financial Markets and Portfolio Management, Springer, Springer, vol. 21(2), pages 221-240, June.

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