In order to asses the credibility of their targets and policies, in- °ation targeting central banks always keep an eye on market expectations of the future in°ation rates and short maturity interest rates. In economies with developed ¯nancial markets the prices of ¯nancial assets are a prime source of expectations. The spot curve, in particular, is thought to contain a great deal of information on market expectations. In this paper we study the pos- sibility to obtain market expectations on short maturity interest rates, that is, on the future monetary policy. A natural starting point in the program of deriving expectations from the spot curve is the Expectations Hypothesis of the Term Structure of the Interest Rates. According to this hypothesis the slope of the spot curve, the forward curve, represents the market expectations on interest rates aside from a negligible or at least time invariant forward term premium. For this note we developed a unique database of spot curves span- ning the period from Nov-1999 to Sep-2006 in order to test the validity of the Expectations Hypothesis for short maturities in Colombia. Our results indi- cate that the spot curve contains information on the future behavior of short maturity interest rates only for very short horizons. Moreover, we found that the forward term premium tend to be time varying. These result comprise in the rejection of the Expectations Hypothesis. Although these results imply that market expectations on future short maturity interest rates can not be obtained as easily as just applying the prescription of the Expectations Hy- pothesis, they do not rule out the possibility to obtain market expectations of the future monetary policy from the time series of spot curves.
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Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number
004289.
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