Monetary Policy Surprises and the Expectations Hypothesis at the Short End of the Yield Curve

11 Pages Posted: 5 Jul 2007

See all articles by Selva Demiralp

Selva Demiralp

Koc University - Department of Economics

Date Written: June 2007

Abstract

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

Suggested Citation

Demiralp, Selva, Monetary Policy Surprises and the Expectations Hypothesis at the Short End of the Yield Curve (June 2007). Available at SSRN: https://ssrn.com/abstract=998434 or http://dx.doi.org/10.2139/ssrn.998434

Selva Demiralp (Contact Author)

Koc University - Department of Economics ( email )

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