DP1752 Exchange Rate Regimes and the Expectations Hypothesis of the Term Structure

Author(s): Stefan Gerlach, Frank Smets
Publication Date: November 1997
Keyword(s): Expectations Hypothesis, Speculative Attacks, Term Structure of Interest Rates
JEL(s): E4
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1752

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.