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Does The Spot Curve Contain Information On Future Monetary Policy In Colombia

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  • Juan Manuel Julio

Abstract

In order to asses the credibility of their targets and policies, in-°ation targeting central banks always keep an eye on market expectations ofthe future in°ation rates and short maturity interest rates. In economies withdeveloped ¯nancial markets the prices of ¯nancial assets are a prime sourceof expectations. The spot curve, in particular, is thought to contain a greatdeal of information on market expectations. In this paper we study the pos-sibility to obtain market expectations on short maturity interest rates, thatis, on the future monetary policy. A natural starting point in the program ofderiving expectations from the spot curve is the Expectations Hypothesis ofthe Term Structure of the Interest Rates. According to this hypothesis theslope of the spot curve, the forward curve, represents the market expectationson interest rates aside from a negligible or at least time invariant forward termpremium. For this note we developed a unique database of spot curves span-ning the period from Nov-1999 to Sep-2006 in order to test the validity of theExpectations Hypothesis for short maturities in Colombia. Our results indi-cate that the spot curve contains information on the future behavior of shortmaturity interest rates only for very short horizons. Moreover, we found thatthe forward term premium tend to be time varying. These result comprisein the rejection of the Expectations Hypothesis. Although these results implythat market expectations on future short maturity interest rates can not beobtained as easily as just applying the prescription of the Expectations Hy-pothesis, they do not rule out the possibility to obtain market expectations ofthe future monetary policy from the time series of spot curves.

Suggested Citation

  • Juan Manuel Julio, 2007. "Does The Spot Curve Contain Information On Future Monetary Policy In Colombia," Borradores de Economia 4289, Banco de la Republica.
    • Handle: RePEc:col:000094:004289
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    References listed on IDEAS

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    1. Soderlind, Paul & Svensson, Lars, 1997. "New techniques to extract market expectations from financial instruments," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 383-429, October.
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    3. 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.
    4. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-692, September.
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    More about this item

    Keywords

    Market Expectations of future Monetary Policy; Expectations Hy-pothesis; Term Structure.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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