Uncertainty on Monetary Policy and the Expectations Model of the Term Structure of Interest Rates

Favero, Carlo A.; Mosca, Federico

doi:10.2139/ssrn.265894

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Uncertainty on Monetary Policy and the Expectations Model of the Term Structure of Interest Rates

IGIER Working Paper No. 179

11 Pages Posted: 5 Apr 2001

See all articles by Carlo A. Favero

Carlo A. Favero

Bocconi University - Department of Economics; Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Federico Mosca

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Date Written: November 2000

Abstract

In this paper we jointly estimate 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 expectations theory cannot be rejected in periods of low uncertainty on monetary policy.

Keywords: forward-looking reaction functions, term structure of interest rates, expectations model

JEL Classification: E44, E52, F41

Suggested Citation: Suggested Citation

Favero, Carlo A. and Mosca, Federico, Uncertainty on Monetary Policy and the Expectations Model of the Term Structure of Interest Rates (November 2000). IGIER Working Paper No. 179, Available at SSRN: https://ssrn.com/abstract=265894 or http://dx.doi.org/10.2139/ssrn.265894