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Was There a "Peso Problem" in the U.S. Term Structure of Interest Rates:1979-1982?

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  • Karen K. Lewis

Abstract

During the period following October 1979 through 1982, the U.S. Federal Reserve allowed interest rates to fluctuate widely, in contrast to its previous policy of targeting these rates in the 1970. The policy was abandoned in 1982 in favor of an operating procedure that reduced the variation in interest rates. This paper implements an estimation method to identify from the term structure of Eurodollar returns the market's beliefs that the Fed may revert to interest rate targeting. The model is not rejected and gives plausible estimates of the probability of a switch in monetary regimes.

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  • Karen K. Lewis, 1990. "Was There a "Peso Problem" in the U.S. Term Structure of Interest Rates:1979-1982?," NBER Working Papers 3282, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:3282
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    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
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    1. Conway, Patrick, 2012. "The exchange rate as nominal anchor: A test for Ukraine," Journal of Comparative Economics, Elsevier, vol. 40(3), pages 438-456.
    2. Markku Lanne, 2003. "Testing the Expectations Hypothesis of the Term Structure of Interest Rates in the Presence of a Potential Regime Shift," Manchester School, University of Manchester, vol. 71(s1), pages 54-67, September.
    3. Psaradakis Zacharias & Sola Martin & Spagnolo Fabio, 2006. "Instrumental-Variables Estimation in Markov Switching Models with Endogenous Explanatory Variables: An Application to the Term Structure of Interest Rates," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(2), pages 1-31, May.
    4. Gao, Huan & Mamon, Rogemar & Liu, Xiaoming & Tenyakov, Anton, 2015. "Mortality modelling with regime-switching for the valuation of a guaranteed annuity option," Insurance: Mathematics and Economics, Elsevier, vol. 63(C), pages 108-120.
    5. Chakraborty, Avik, 2009. "Learning, The Forward Premium Puzzle, And Market Efficiency," Macroeconomic Dynamics, Cambridge University Press, vol. 13(S1), pages 31-57, May.
    6. Fuentes, Cesar A. & Rios, Ronald, 2014. "Non-explicit FOREX intervention: The role of the Central Reserve Bank in a dollarized economy and its effects on expectations from the “peso problem” perspective: The case of Peru," Journal of Business Research, Elsevier, vol. 67(4), pages 558-566.
    7. Seo, Byeongseon, 2003. "Nonlinear mean reversion in the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11), pages 2243-2265.
    8. Brooks, Chris & Rew, Alistair G., 2002. "Testing for non-stationarity and cointegration allowing for the possibility of a structural break: an application to EuroSterling interest rates," Economic Modelling, Elsevier, vol. 19(1), pages 65-90, January.
    9. Tsuchiya, Yoichi, 2016. "Asymmetric loss and rationality of Chinese renminbi forecasts: An implication for the trade between China and the US," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 116-127.

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