Does Macroeconomics Help Us To Understand the Term Structure of Interest Rates?
AbstractThe expectations model of the term structure states that the yields to maturity of long-term bonds are equal to the average of expected future short-term bond yields. This venerable model has been subjected to numerous empirical tests and almost invariably rejected. The empirical failure is generally attributed either to systematic expectations errors, or to shifts in the risk premia. In fact, the empirical tests, based on the estimation of single-equation models, are not able to discriminate between these two hypotheses. A recent strand of the macro-economic literature has analysed monetary policy by including the central bank reaction function is small empirical macro models. By simulating these models forward it is possible to derive the full forward path of short-term interest rates and hence to construct any long-term interest rate consistent with the expectations model. A direct test of the theory, based on full information, can then be immediately constructed by comparing observed long-term rates with the simulated ones and the associated 95% confidence interval. This is what we do in this Paper. Our results shed new light on the empirical validity of the expectations model.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2849.
Date of creation: Jun 2001
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Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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