Working Paper: CEPR ID: DP1752
Authors: Stefan Gerlach; Frank Smets
Abstract: This paper uses weekly data on short-term eurorates for ten countries for the period 1979?96 to document that the ability of the expectations hypothesis (EH) to account for movements in the term structure is greater, and that short-term interest rates are more predictable, under fixed than under floating exchange rates. The paper also shows that the higher predictability does not arise solely because of monetary policy responses to speculative pressures in the foreign exchange markets: while it is more difficult to reject the EH in periods of exchange market turmoil, the EH is not rejected in tranquil periods.
Keywords: term structure of interest rates; expectations hypothesis; speculative attacks
JEL Codes: E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate regime (F33) | predictability of short-term interest rates (E43) |
| intermediate exchange rate targets (F31) | expectations hypothesis (EH) rejection (D84) |
| speculative attacks (D84) | predictability of short-term interest rates (E43) |
| exchange rate regime (F33) | rejection of expectations hypothesis (EH) (D84) |
| calm periods (E32) | rejection of expectations hypothesis (EH) (D84) |
| floating exchange rate countries (F31) | time-varying term premia (E43) |