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Tests of the Expectations Hypothesis and Policy Reaction to the Term Spread: Some Comparative Evidence

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  • Boero, G.
  • Torricelli, C.

Abstract

The aim of this paper is to evaluate the impact of monetary policy in tests of the Expectations Hypothesis of the term structure of interest rates. We apply the model developed by McCallum (1994b), in which the Expectations Hypothesis interacts with a policy reaction function and with a time-varying term premium, to eight countries with different monetary policy stances, within the period 1985 to 1995. The results suggest the importance of the treatment of monetary policy in explaining the empirical performance of the Expectations Hypothesis. Amongst other results, we also find that the model performs better for some countries than others depending upon the monetary policy stance adopted.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp10.pdf
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Bibliographic Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 512.

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Length: 27 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:wrk:warwec:512

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Keywords: EXPECTATIONS ; INTEREST RATE ; MONETARY POLICY;

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References

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  1. Bennett T. McCallum, 1992. "A Reconsideration of the Uncovered Interest Parity Relationship," NBER Working Papers 4113, National Bureau of Economic Research, Inc.
  2. G. Boero & C. Torricelli, 1997. "The expectations hypothesis of the term structure: Evidence for Germany," Working Paper CRENoS 199704, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
  3. Evans, Martin D. D. & Lewis, Karen K., 1994. "Do stationary risk premia explain it all?: Evidence from the term structure," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(2), pages 285-318, April.
  4. 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.
  5. Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
  6. Stefan Gerlach & Frank Smets, 1995. "The term structure of Euro-rates: some evidence in support of the expectations hypothesis," BIS Working Papers 28, Bank for International Settlements.
  7. Hsu, Chiente & Kugler, Peter, 1997. "The Revival of the Expectations Hypothesis of the US Term Structure of Interest Rates," Economics Letters, Elsevier, Elsevier, vol. 55(1), pages 115-120, August.
  8. Geert Bekaert & Robert J. Hodrick & David Marshall, 1996. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Working Paper Series, Issues in Financial Regulation, Federal Reserve Bank of Chicago WP-96-3, Federal Reserve Bank of Chicago.
  9. 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.
  10. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, Elsevier, vol. 35(2), pages 245-274, April.
  11. John Y. Campbell & Robert J. Shiller, 1989. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," NBER Working Papers 3153, National Bureau of Economic Research, Inc.
  12. Engsted, Tom & Tanggaard, Carsten, 1995. " The Predictive Power of Yield Spreads for Future Interest Rates: Evidence from the Danish Term Structure," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 97(1), pages 145-59, March.
  13. Gianna Boero & Costanza Torricelli, 2002. "The information in the term structure of German interest rates," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 8(1), pages 21-45.
  14. Michael Dotsey & Christopher Otrok, 1995. "The rational expectations hypothesis of the term structure, monetary policy, and time-varying term premia," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Win, pages 65-81.
  15. Bennett T. McCallum, 2005. "Monetary policy and the term structure of interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Fall, pages 1-21.
  16. Tzavalis, Elias & Wickens, Michael R, 1997. "Explaining the Failures of the Term Spread Models of the Rational Expectations Hypothesis of the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(3), pages 364-80, August.
  17. Kugler, Peter, 1997. "Central Bank Policy Reaction and the Expectations Hypothesis of the Term Structure," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 2(3), pages 217-24, July.
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Cited by:
  1. Luisa Malaguti & Costanza Torricelli, 2001. "The rational expectation dynamics of a model for the term structure and monetary policy," Decisions in Economics and Finance, Springer, Springer, vol. 24(2), pages 137-152, November.

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