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TESTING THE EXPECTATIONS THEORY OF THE TERM STRUCTURE OF INTEREST RATES IN THRESHOLD MODELS

Published online by Cambridge University Press:  01 August 2003

MICHAEL P. CLEMENTS  and
ANA BEATRIZ C. GALVÃO
MICHAEL P. CLEMENTS
Affiliation:
University of Warwick
ANA BEATRIZ C. GALVÃO
Affiliation:
European University Institute
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Abstract

We test the expectations theory of the term structure of U.S. interest rates in nonlinear systems. These models allow the response of the change in short rates to past values of the spread to depend upon the level of the spread. The nonlinear system is tested against a linear system, and the results of testing the expectations theory in both models are contrasted. We find that the results of tests of the implications of the expectations theory depend on the size and sign of the spread. The long maturity spread predicts future changes of the short rate only when it is high.

Keywords

Term StructureExpectations TheoryThreshold Models

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 7 , Issue 4 , September 2003 , pp. 567 - 585
Copyright
© 2003 Cambridge University Press

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