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Exchange rate regimes and the expectations hypothesis of the term structure

  • Stefan Gerlach
  • Frank Smets

    (European Central Bank (ECB))

This paper uses weekly data on short-term eurorates for ten countries for the period 1979-96 to document that the ability of the expectations hypothesis (EH) to account for movements in the term structure is greater, and that short- term interest rates are more predictable, under fixed than under floating exchange rates. The paper also shows that the higher predictability does not arise solely because of monetary policy responses to speculative pressures in the foreign exchange markets: while it is more difficult to reject the EH in periods of exchange market turmoil, the EH is not rejected in tranquil periods.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 43.

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Length: 30 pages
Date of creation: Jul 1997
Date of revision:
Handle: RePEc:bis:biswps:43
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  1. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April.
  2. N. Gregory Mankiw & Jeffrey A. Miron, 1985. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc.
  3. Stefan Gerlach, 1996. "Monetary policy and the behaviour of interest rates: are long rates excessively volatile?," BIS Working Papers 34, Bank for International Settlements.
  4. Svensson, Lars E. O., 1993. "Assessing target zone credibility : Mean reversion and devaluation expectations in the ERM, 1979-1992," European Economic Review, Elsevier, vol. 37(4), pages 763-793, May.
  5. Hardouvelis, Gikas A, 1988. " The Predictive Power of the Term Structure during Recent Monetary Regimes," Journal of Finance, American Finance Association, vol. 43(2), pages 339-56, June.
  6. Kugler, Peter, 1990. "The term structure of Euro interest rates and rational expectations," Journal of International Money and Finance, Elsevier, vol. 9(2), pages 234-244, June.
  7. 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 for Research in Economics, Yale University.
  8. Dahlquist, Magnus & Jonsson, Gunnar, 1995. "The information in Swedish short-maturity forward rates," European Economic Review, Elsevier, vol. 39(6), pages 1115-1131, June.
  9. Kugler, Peter, 1988. "An Empirical Note on the Term Structure and Interest Rate Stabilization Policies," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 789-92, November.
  10. Jondeau, E. & Ricart, R., 1996. "The Expectation Theory: Tests on French, German, and American Euro-Rates," Working papers 35, Banque de France.
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