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.