DP2748 Uncertainty on Monetary Policy and the Expectational Model of the Term Structure of Interest Rates
|Author(s):||Carlo A. Favero, Federico Mosca|
|Publication Date:||March 2001|
|Keyword(s):||Expectations Model, Forward-Looking Reaction Functions, Term Structure Of Interest Rates|
|JEL(s):||E44, E52, F41|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=2748|
In this Paper we estimate jointly a forward-looking reaction function for the three-month rate along with a term structure relationship linking the six-month interest rates to current and expected future three-month rates. In our empirical model the response of the six-month interest rates to current and future three-month interest rates is allowed to depend on uncertainty on monetary policy. The expectation theory cannot be rejected in periods of low uncertainty on monetary policy.