Tests of the expectations hypothesis and policy reaction to the term spread: some comparative evidence

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Boero, Gianna ; Torricelli, Costanza (1998)
  • Publisher: University of Warwick, Department of Economics
  • Subject: HB

The aim of this paper is to evaluate the impact of monetary policy in tests of the Expectations Hypothesis of the term structure of interest rates. We apply the model developed by McCallum (1994b), in which the Expectations Hypothesis interacts with a policy reaction function and with a time-varying term premium, to eight countries with different monetary policy stances, within the period 1985 to 1995. The results suggest the importance of the treatment of monetary policy in explaining the empirical performance of the Expectations Hypothesis. Amongst other results, we also find that the model performs better for some countries than others depending upon the monetary policy stance adopted.
  • References (4)

    Bekaert, Hodrick and Marshall, 1997, On biases in tests of the expectations hypothesis of the term structure of interest rates, Journal of Financial Economics, 44, 309-348.

    Boero G., F. Madjlessi F. and C. Torricelli, 1996, The information in the term structure of German interest rates, Proceedings of the VI International AFIR Colloquium, Nürnberg, October 1996, VVW Karlsruhe.

    Boero G. and C.Torricelli, 1997, The Expectations Hypothesis of the term structure of interest rates: evidence for Germany, Contributi di ricerca CRENOS, n. 4, Università di Cagliari, settembre.

    Campbell J.Y. and R.J. Shiller, 1991, Yield spread and interest rate movements: a 0.76 0.95 0.02 0.68 0.92 0.50 0.64 0.84 1.86 0.51 0.89**

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