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The Expectations Hypothesis and Decoupling of Short- and Long-Term US Interest Rates: A Pairwise Approach

Listed author(s):
  • Mark Holmes

    ()

    (Department of Economics, Waikato University, New Zealand)

  • Jesus Otero

    ()

    (Faculty of Economics, University of Rosario, Colombia)

  • Theodore Panagiotidis

    ()

    (Department of Economics, University of Macedonia, Greece; The Rimini Centre for Economic Analysis, Italy)

The link between short-term policy rates and long-term rates elucidate the potential effectiveness of monetary policy. We examine the US term structure of interest rates using a pairwise econometric approach advocated by Pesaran (2007). Our empirical modeling strategy employs a probabilistic test statistic for the expectations among all interest rate differentials. We find support for the expectations hypothesis and provide new insights into the nature of interest rate decoupling which are of value to policymakers. The maturity gap associated with interest rate pairs negatively impacts on the probability of stationarity, and also on the speed of adjustment towards long-run equilibrium. We further show that the speed of adjustment has become more sensitive to the maturity gap over time.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 15-31.

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Date of creation: Sep 2015
Handle: RePEc:rim:rimwps:15-31
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