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Does The Spot Curve Contain Information On Future Monetary Policy In Colombia?

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  • Juan Manuel Julio Román

Abstract

In order to asses the credibility of their targets and policies, inflation targeting central banks always keep an eye on market expectations of the future inflation rates and short maturity interest rates. In economies with developed financial markets the prices of financial assets are a prime source of expectations. Thespot curve, in particular, is thought to contain a great deal of information on market expectations. In this paper we study the possibility to obtain market expectations on short maturity interest rates, that is, on the future monetary policy. A natural starting point in the program of deriving expectations from the spot curve is the Expectations Hypothesis of the Term Structure of the Interest Rates. According to this hypothesis the slope of the spot curve, the forward curve, represents the market expectations on interest rates aside from a negligible or at least time invariant forward term premium. For this note we developed a unique database of spot curves spanning the period from Nov-1999 to Sep-2006 in order to test the validity of the Expectations Hypothesis for short maturities in Colombia. Our results indicate that the spot curve contains information on the future behavior of short maturity interest rates only for very short horizons. Moreover, we found that The forward termpremium tend to be time varying. These result comprise in the rejection of the Expectations Hypothesis. Although these results imply that market expectations on future short maturity interest rates can not be obtained as easily as just applying the prescription of the Expectations Hypothesis, they do not Rule out the possibility to obtain market expectations of the future monetary policy from the time series of spot curves.

Suggested Citation

  • Juan Manuel Julio Román, 2007. "Does The Spot Curve Contain Information On Future Monetary Policy In Colombia?," Borradores de Economia 463, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:463
    DOI: 10.32468/be.463
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    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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

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