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Monetary policy and the behaviour of interest rates: are long rates excessively volatile?

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  • Stefan Gerlach

Abstract

This paper employs data on short and long interest rates for the G-10 countries, Australia, Austria and Spain to assess the expectations hypothesis (EH) of the term structure, using the Campbell-Shiller (1987, 1991) methodology. Although the EH is rejected in several countries, in all countries actual and theoretical long interest rates do move closely over time. This finding suggests that, at least from a monetary policy perspective, it is appropriate to view long interest rates as determined largely by expectations held by financial market participants concerning the future path of short term interest rates.

Suggested Citation

  • Stefan Gerlach, 1996. "Monetary policy and the behaviour of interest rates: are long rates excessively volatile?," BIS Working Papers 34, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:34
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    References listed on IDEAS

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    Cited by:

    1. Sandrine Lardic & Valérie Mignon, 2004. "Fractional cointegration and the term structure," Empirical Economics, Springer, vol. 29(4), pages 723-736, December.
    2. Jardet, Caroline, 2008. "Term structure anomalies: Term premium or peso-problem?," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 592-608, June.
    3. Ron Lange, 1999. "The Expectations Hypothesis for the Longer End of the Term Structure: Some Evidence for Canada," Staff Working Papers 99-20, Bank of Canada.
    4. Nicolas Rautureau, 2004. "Modèles à changement de régime et test de la théorie des anticipations rationnelles de la structure par terme des taux dintérêt en France," Économie et Prévision, Programme National Persée, vol. 163(2), pages 117-129.
    5. Gerlach, Stefan & Smets, Frank, 1997. "Exchange Rate Regimes and the Expectations Hypothesis of the Term Structure," CEPR Discussion Papers 1752, C.E.P.R. Discussion Papers.
    6. repec:adr:anecst:y:2001:i:62:p:07 is not listed on IDEAS
    7. Marvin Goodfriend, 1998. "Using the term structure of interest rates for monetary policy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 13-30.
    8. Éric Jondeau & Roland Ricart, 1998. "La théorie des anticipations de la structure par terme : test à partir de titres publics français," Annals of Economics and Statistics, GENES, issue 52, pages 1-22.
    9. Jean-michel Sahut, 2010. "A Flexible Non Linear Model to Test the Expectation Hypothesis of Interest Rates," Economics Bulletin, AccessEcon, vol. 30(3), pages 2297-2311.
    10. Antzoulatos, Angelos A., 2002. "Benchmark yield undershooting in the E.M.U," HWWA Discussion Papers 191, Hamburg Institute of International Economics (HWWA).
    11. Smets, Frank & Tsatsaronis, Kostas, 1997. "Why Does the Yield Curve Predict Economic Activity? Dissecting the Evidence for Germany and the United States," CEPR Discussion Papers 1758, C.E.P.R. Discussion Papers.
    12. Éric Jondeau, 2001. "La théorie des anticipations de la structure par terme permet-elle de rendre compte de l'évolution des taux d'intérêt sur euro-devise ?," Annals of Economics and Statistics, GENES, issue 62, pages 139-174.
    13. Jondeau, E. & Sedillot, F., 1998. "La prevision des taux longs français et allemands a partir d'un modele a anticipations rationnelles," Working papers 55, Banque de France.
    14. Medhi Mili & Jean-Michel Sahut & Fred�ric Teulon, 2012. "New evidence of the expectation hypothesis of interest rates: a flexible nonlinear approach," Applied Financial Economics, Taylor & Francis Journals, vol. 22(2), pages 165-176, January.
    15. repec:adr:anecst:y:1998:i:52:p:01 is not listed on IDEAS
    16. M. Isabel Martínez-Serna & Eliseo Navarro-Arribas, 2002. "El modelo de McCallum. Evidencia empírica en la estructura temporal de los tipos de interés española," Investigaciones Economicas, Fundación SEPI, vol. 26(2), pages 323-357, May.
    17. Eric Jondeau & Franck Sédillot, 1999. "Forecasting French and German long-term rates using a rational expectations model," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 135(3), pages 413-436, September.
    18. Jondeau, E. & Ricart, R., 1999. "The Information Content of the French and German Government Bond Tield Curves: Why Such Differences?," Working papers 61, Banque de France.
    19. Antzoulatos, Angelos A., 2002. "Benchmark Yield Undershooting in the E.M.U," Discussion Paper Series 26207, Hamburg Institute of International Economics.

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