Exchange Rate Regimes and the Expectations Hypothesis of the Term Structure

BIS Working Paper No. 43

CEPR Discussion Paper Series No. 1752

30 Pages Posted: 13 Dec 2005

See all articles by Stefan Gerlach

Stefan Gerlach

Central Bank of Ireland; Centre for Economic Policy Research (CEPR)

Frank Smets

European Central Bank (ECB); KU Leuven - Center for Economic Studies

Date Written: November 1997

Abstract

This paper uses weekly data on short-term eurorates for ten countries for the period 1979-96 to document that the ability of the expectations hypothesis (EH) to account for movements in the term structure is greater, and that short-term interest rates are more predictable, under fixed than under floating exchange rates. The paper also shows that the higher predictability does not arise solely because of monetary policy responses to speculative pressures in the foreign exchange markets: while it is more difficult to reject the EH in periods of exchange market turmoil, the EH is not rejected in tranquil periods.

JEL Classification: E43, F31, G12

Suggested Citation

Gerlach, Stefan and Smets, Frank, Exchange Rate Regimes and the Expectations Hypothesis of the Term Structure (November 1997). BIS Working Paper No. 43, CEPR Discussion Paper Series No. 1752, Available at SSRN: https://ssrn.com/abstract=99688 or http://dx.doi.org/10.2139/ssrn.99688

Stefan Gerlach (Contact Author)

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Frank Smets

European Central Bank (ECB) ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+49 69 1344 6550 (Phone)
+49 69 1344 6575 (Fax)

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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