DP2748 | Uncertainty on Monetary Policy and the Expectational Model of the Term Structure of Interest Rates

Publication Date

27/03/2001

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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.