This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Anticipated Monetary Policy and the Dynamic Behaviour of the Term Structure of Interest Rates

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Jääskelä, Jarkko
Vilmunen, Jouko () (Bank of Finland Research)
Abstract

This paper investigates the measurement of anticipated interest rate policy and the effects of these expectations on the term structure of nominal interest rates. It is shown that, under the expectations hypothesis, the level of long-term interest rates depends on three factors: the level of the monetary policy interest rate, ie the steering rate; the spread between the market interest rate and the steering rate; and market expectations of the next steering rate change. The theoretical model builds on the assumption that market participants have only imperfect knowledge of the mechanism whereby changes in the steering rate are determined. As a consequence, expectations formation, although realistic, need not be entirely rational. Steering rate changes take the form of discrete jumps and occur infrequently on a daily scale. Given these assumptions, discussion of the determination of the term structure is related to the literature on uncertainty about monetary policy regimes and small samples, ie "peso" problems. Empirical analysis based on Nelson–Siegel estimates of the daily yield curves in Finland in the period 1 January 1993 to 31 October 1997 complements the theoretical discussion. The observed differences between estimated market expectations and actual tender rate changes are quite large in the sample, particularly for the longer maturities. The approach applied in this study is promising, not only in the sense of potentially providing estimates of market expectations concerning future discrete changes in monetary policy interest rates but also in the sense of its apparent potential in accounting for the often reported poor empirical performance of the expectations hypothesis.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.bof.fi/NR/rdonlyres/95BFABEA-F41E-44CD-9928-080226B02393/0/9912.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Bank of Finland in its series Research Discussion Papers with number 12/1999.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 39 pages
Date of creation: 10 Sep 1999
Date of revision:
Handle: RePEc:hhs:bofrdp:1999_012

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.bof.fi/en/tutkimus
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Minna Nyman).

Related research
Keywords: term structure of interest rates; expectations; target changes; peso problems;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Leonardo Bartolini & Giuseppe Bertola & Alessandro Prati, 2000. "Day-to-day monetary policy and the volatility of the federal funds interest rate," Staff Reports 110, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  2. Kozicki, Sharon & Tinsley, P. A., 2001. "Term structure views of monetary policy under alternative models of agent expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 25(1-2), pages 149-184, January. [Downloadable!] (restricted)
  3. Sola, Martin & Driffill, John, 1994. "Testing the term structure of interest rates using a stationary vector autoregression with regime switching," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 601-628. [Downloadable!] (restricted)
  4. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-82, April.
    Other versions:
  5. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 2001. "Peso problem explanations for term structure anomalies," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 241-270, October. [Downloadable!] (restricted)
    Other versions:
  6. Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 53-111, December. [Downloadable!] (restricted)
    Other versions:
  7. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 44(3), pages 309-348, June. [Downloadable!] (restricted)
    Other versions:
  8. N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. William Roberds & Charles H. Whiteman, 1996. "Endogenous term premia and anomalies in the term structure of interest rates: explaining the predictability smile," Working Paper 96-11, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  10. Mark Fisher & Christian Gilles, 1998. "Around and Around: The Expectations Hypothesis," Journal of Finance, American Finance Association, vol. 53(1), pages 365-383, 02. [Downloadable!] (restricted)
  11. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March. [Downloadable!] (restricted)
  12. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper 90-06, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  13. Balduzzi, Pierluigi & Bertola, Giuseppe & Foresi, Silverio, 1997. "A model of target changes and the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 223-249, July. [Downloadable!] (restricted)
    Other versions:
  14. Pierluigi Balduzzi & Giuseppe Bertola & Silverio Foresi & Leora Klapper, 1997. "Interest Rate Targeting and the Dynamics of Short-Term Rates," NBER Working Papers 5944, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. N. Gregory Mankiw, 1986. "The Term Structure of Interest Rates Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1986-1), pages 61-110. [Downloadable!]
  16. Engsted, Tom & Tanggaard, Carsten, 1994. "Cointegration and the US term structure," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 167-181, January. [Downloadable!] (restricted)
  17. 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. [Downloadable!] (restricted)
  18. Vilmunen, J., 1998. "Macroeconomic Effects of Looming Policy Shifts: Non-Falsified Expectations and Peso Problems," Bank of Finland - Studies in Economics and Finance 13/98, Bank of Finland. Research Department..
  19. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 495-514, May. [Downloadable!] (restricted)
    Other versions:
  20. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October. [Downloadable!] (restricted)
    Other versions:
  21. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Cowles Foundation Discussion Papers 667, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  22. Sharon Kozicki & P.A. Tinsley, 1998. "Term structure views of monetary policy," Research Working Paper 98-07, Federal Reserve Bank of Kansas City. [Downloadable!]
  23. Gerlach, Stefan & Smets, Frank, 1997. "Exchange Rate Regimes and the Expectations Hypothesis of the Term Structure," CEPR Discussion Papers 1752, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  24. Longstaff, Francis A & Schwartz, Eduardo S, 1992. " Interest Rate Volatility and the Term Structure: A Two-Factor General Equilibrium Model," Journal of Finance, American Finance Association, vol. 47(4), pages 1259-82, September. [Downloadable!] (restricted)
  25. Gerlach, Stefan & Smets, Frank, 1995. "The Term Structure of Euro-Rates: Some Evidence in Support of the Expectations Hypothesis," CEPR Discussion Papers 1258, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  26. Mankiw, N Gregory & Miron, Jeffrey A & Weil, David N, 1987. "The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve," American Economic Review, American Economic Association, vol. 77(3), pages 358-74, June. [Downloadable!] (restricted)
    Other versions:
  27. Aiyagari, S. Rao & Braun, R. Anton, 1998. "Some models to guide monetary policymakers," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 1-42, June. [Downloadable!] (restricted)
  28. Martin D.D. Evans, 1995. "Peso Problems: Their Theoretical and Empirical Implications," Working Papers 95-05, New York University, Leonard N. Stern School of Business, Department of Economics.
  29. Mishkin, Frederic S & Simon, John, 1995. "An Empirical Examination of the Fisher Effect in Australia," The Economic Record, The Economic Society of Australia, vol. 71(214), pages 217-29, September.
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lanne, Markku, 1999. "Testing the Expectations Hypothesis of the Term Structure of Interest Rates in the Presence of a Potential Regime Shift," Research Discussion Papers 20/1999, Bank of Finland. [Downloadable!]
    Other versions:
  2. Jukka Topi & Jouko Vilmunen, 2001. "Transmission of monetary policy shocks in Finland: evidence from bank level data on loans," Working Paper Series 100, European Central Bank. [Downloadable!]
Statistics
Access and download statistics

Did you know? IDEAS is not the only service displaying RePEc data. Choose on RePEc which service fits your needs best.

This page was last updated on 2009-12-3.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.