Testing the Expectations Hypothesis When Interest Rates are Near Integrated
Meredith J. Beechey
Monetary Policy Division, Sveriges Riksbank
Queen Mary - University of London, School of Economics and Finance
Uppsala University - Department of Economics
October 27, 2008
FRB International Finance Discussion Paper No. 953
Nominal interest rates are unlikely to be generated by unit-root processes. Using data on short and long interest rates from eight developed and six emerging economies, we test the expectations hypothesis using cointegration methods under the assumption that interest rates are near integrated. If the null hypothesis of no cointegration is rejected, we then test whether the estimated cointegrating vector is consistent with that suggested by the expectations hypothesis. The results show support for cointegration in ten of the fourteen countries we consider, and the cointegrating vector is similar across countries. However, the parameters differ from those suggested by theory. We relate our findings to existing literature on the failure of the expectations hypothesis and to the role of term premia.
Number of Pages in PDF File: 38
Keywords: Bonferroni tests, cointegration, expectations hypothesis, near integration, term premium
JEL Classification: C22, G12working papers series
Date posted: November 17, 2008
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