Working Paper: CEPR ID: DP1258
Authors: Stefan Gerlach; Frank Smets
Abstract: This paper studies one-, three-, six- and twelve-month Euro-rates for 17 countries using between 10 and 30 years of data. Term spreads contain information about future short-term rates in all 51 regressions that we estimate. Furthermore, in 35 cases we accept the expectations hypothesis. Using cross-sectional regressions, we estimate the variance of the term premium and the correlation of the term premium and the expected change in short rates. The estimates are compatible with existing informal estimates. We conclude that, despite the presence of a time-varying term premium, for many countries the expectations hypothesis is broadly compatible with the data.
Keywords: term structure of interest rates; expectations hypothesis
JEL Codes: E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| term spread (C41) | future short-term interest rates (E43) |
| failure of the expectations hypothesis (D84) | lack of predictability in short-term rates (E43) |
| time-varying term premium (C22) | downward bias in estimates (C51) |