DOES THE SPOT CURVE CONTAIN INFORMATION ON FUTURE MONETARY POLICY IN COLOMBIA

Juan Julio

No 4289, Borradores de Economia from Banco de la Republica

Abstract: In order to asses the credibility of their targets and policies, in-°ation targeting central banks always keep an eye on market expectations ofthe future in°ation rates and short maturity interest rates. In economies withdeveloped ¯nancial markets the prices of ¯nancial assets are a prime sourceof expectations. The spot curve, in particular, is thought to contain a greatdeal of information on market expectations. In this paper we study the pos-sibility to obtain market expectations on short maturity interest rates, thatis, on the future monetary policy. A natural starting point in the program ofderiving expectations from the spot curve is the Expectations Hypothesis ofthe Term Structure of the Interest Rates. According to this hypothesis theslope of the spot curve, the forward curve, represents the market expectationson interest rates aside from a negligible or at least time invariant forward termpremium. For this note we developed a unique database of spot curves span-ning the period from Nov-1999 to Sep-2006 in order to test the validity of theExpectations Hypothesis for short maturities in Colombia. Our results indi-cate that the spot curve contains information on the future behavior of shortmaturity interest rates only for very short horizons. Moreover, we found thatthe forward term premium tend to be time varying. These result comprisein the rejection of the Expectations Hypothesis. Although these results implythat market expectations on future short maturity interest rates can not beobtained as easily as just applying the prescription of the Expectations Hy-pothesis, they do not rule out the possibility to obtain market expectations ofthe future monetary policy from the time series of spot curves.

Keywords: Market Expectations of future Monetary Policy; Expectations Hy-pothesis; Term Structure. (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
Date: 2007-11-01
New Economics Papers: this item is included in nep-mac and nep-mon
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Working Paper: DOES THE SPOT CURVE CONTAIN INFORMATION ON FUTURE MONETARY POLICY IN COLOMBIA? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000094:004289

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