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

  • MICHAEL P. CLEMENTS (a1) and ANA BEATRIZ C. GALVÃO (a2)
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.

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Corresponding author
We acknowledge the helpful comments of two anonymous referees. Financial support from the UK Economic and Social Research Council under grant L138251009 is gratefully acknowledged by the first author, and from Capes-Brazil by the second author. The computations reported in this paper were performed using code written in the Gauss Programming Language. Address correspondence to: Michael P. Clements, Department of Economics, University of Warwick, Coventry CV4 7AL UK; e-mail: M.P.Clements@warwick.ac.uk.
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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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