Monetary Policy Surprises and the Expectations Hypothesis at the Short End of the Yield Curve
11 Pages Posted: 5 Jul 2007
Date Written: June 2007
In this paper we test the expectations hypothesis empirically by analyzing changes in three month Treasury rates after FOMC meetings. If the expectations hypothesis holds, then there should be a one-to-one relationship between changes in the T-Bill rate and changes in path revisions over the duration of the contract. Testing this claim requires an estimation of the policy path revision which has not been done before. In this paper we offer a formal investigation of this argument by estimating the revisions in expectations of future overnight rates over the course of a three-month T-Bill rate. Our findings are highly consistent with the expectations hypothesis.
Keywords: Expectations Hypothesis, Policy Path Revisions
JEL Classification: E43
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