Uncertainty on Monetary Policy and the Expectations Model of the Term Structure of Interest Rates

Carlo Favero () and Federico Mosca

No 179, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: In this paper we jointly estimate a forward-looking reaction function for the three-month rate alongwith 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 expectations theory cannot be rejected in periods of low uncertainty on monetary policy.

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Related works:
Journal Article: Uncertainty on monetary policy and the expectations model of the term structure of interest rates (2001)
Working Paper: Uncertainty on Monetary Policy and the Expectational Model of the Term Structure of Interest Rates (2001)
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