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Exchange rate regimes and the expectations hypothesis of the term structure

Author

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  • Stefan Gerlach
  • Frank Smets

    (European Central Bank (ECB))

Abstract

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.

Suggested Citation

  • Stefan Gerlach & Frank Smets, 1997. "Exchange rate regimes and the expectations hypothesis of the term structure," BIS Working Papers 43, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:43
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    References listed on IDEAS

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    1. Jondeau, E. & Ricart, R., 1996. "The Expectation Theory: Tests on French, German, and American Euro-Rates," Working papers 35, Banque de France.
    2. Peter Kugler, 1988. "An Empirical Note on the Term Structure and Interest Rate Stabilization Policies," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(4), pages 789-792.
    3. N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(2), pages 211-228.
    4. Stefan Gerlach, 1996. "Monetary policy and the behaviour of interest rates: are long rates excessively volatile?," BIS Working Papers 34, Bank for International Settlements.
    5. Dahlquist, Magnus & Jonsson, Gunnar, 1995. "The information in Swedish short-maturity forward rates," European Economic Review, Elsevier, vol. 39(6), pages 1115-1131, June.
    6. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722, Elsevier.
    7. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    8. 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.
    9. 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.
    10. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
    11. 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.
    12. 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 339-356, June.
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    Cited by:

    1. Alfred A. Haug & Pierre L. Siklos, 2002. "The Term Spread International Evidence of Non-Linear Adjustment," Working Papers 2002_08, York University, Department of Economics, revised Jul 2004.
    2. Jelena Zubkova, 2003. "Interest Rate Term Structure in Latvia in the Monetary Policy Context," Working Papers 2003/03, Latvijas Banka.
    3. Siklos, Pierre L, 2000. "Inflation Targets and the Yield Curve: New Zealand and Australia versus the US," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(1), pages 15-32, February.
    4. Jääskelä, Jarkko & Vilmunen, Jouko, 1999. "Anticipated monetary policy and the dynamic behaviour of the term structure of interest rates," Research Discussion Papers 12/1999, Bank of Finland.
    5. Nagayasu, Jun, 2002. "On the term structure of interest rates and inflation in Japan," Journal of Economics and Business, Elsevier, vol. 54(5), pages 505-523.
    6. Petra Gerlach-Kristen, 2007. "Three aspects of the Swiss term structure: an empirical survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 21(2), pages 221-240, June.
    7. Haug Alfred A & Siklos Pierre L, 2006. "The Behavior of Short-Term Interest Rates: International Evidence of Non-Linear Adjustment," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(4), pages 1-34, December.
    8. Nakaota, Hiroshi, 2005. "The term structure of interest rates in Japan: the predictability of economic activity," Japan and the World Economy, Elsevier, vol. 17(3), pages 311-326, August.
    9. Christian Mose Nielsen, 2007. "Does the choice of interest rate data matter for the results of tests of the expectations hypothesis - some results for the UK," Money Macro and Finance (MMF) Research Group Conference 2006 132, Money Macro and Finance Research Group.
    10. repec:zbw:bofrdp:1999_012 is not listed on IDEAS
    11. Bates, David S., 1999. "Financial markets' assessments of EMU," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 51(1), pages 229-269, December.
    12. David S. Bates, 1999. "Financial Markets' Assessment of EMU," NBER Working Papers 6874, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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