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Markov-switching models, rational expectations and the term structure of interest rates

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  • Arielle Beyaert
  • Juan Jose Perez-Castejon

Abstract

In order to evaluate the efficiency of the monetary transmission mechanism, we develop the formulas for testing rational expectations theory in the term structure of interest rates with VAR models of stochastically switching regimes in which all the parameters are regime dependent. These formulas are obtained for the strict version of rational expectations as well as for the case where measurement errors are assumed in the expectations relationship. They are extensible to other contexts that involve variables linked by rational-expectations behaviours. The testing procedure is implemented on interest rates of the Spanish inter-bank money market. Measurement errors must be assumed to find signs favourable to the theory.

Suggested Citation

  • Arielle Beyaert & Juan Jose Perez-Castejon, 2009. "Markov-switching models, rational expectations and the term structure of interest rates," Applied Economics, Taylor & Francis Journals, vol. 41(3), pages 399-412.
  • Handle: RePEc:taf:applec:v:41:y:2009:i:3:p:399-412
    DOI: 10.1080/00036840601007195
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    References listed on IDEAS

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    Cited by:

    1. Sowmya, Subramaniam & Prasanna, Krishna & Bhaduri, Saumitra, 2016. "Linkages in the term structure of interest rates across sovereign bond markets," Emerging Markets Review, Elsevier, vol. 27(C), pages 118-139.
    2. Mao-Wei Hung & Jr-Yan Wang, 2011. "Loss aversion and the term structure of interest rates," Applied Economics, Taylor & Francis Journals, vol. 43(29), pages 4623-4640.
    3. repec:eee:joecas:v:17:y:2018:i:c:p:48-60 is not listed on IDEAS

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