Working Paper: CEPR ID: DP2748
Authors: Carlo A. Favero; Federico Mosca
Abstract: In this Paper we estimate jointly 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 expectation theory cannot be rejected in periods of low uncertainty on monetary policy.
Keywords: expectations model; forward-looking reaction functions; term structure of interest rates
JEL Codes: E44; E52; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uncertainty in monetary policy (E49) | Response of six-month interest rates (E43) |
| Three-month interest rates (E43) | Response of six-month interest rates (E43) |
| Expectation errors (D84) | Response of six-month interest rates (E43) |
| Uncertainty in monetary policy (E49) | Expectation errors (D84) |