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2 edition of Exchange rate regimes and the expectations hypothesis of the term structure found in the catalog.

Exchange rate regimes and the expectations hypothesis of the term structure

Stefan Gerlach

Exchange rate regimes and the expectations hypothesis of the term structure

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Published by Centre for Economic Policy Research in London .
Written in English


Edition Notes

StatementStefan Gerlach and Frank Smets.
SeriesDiscussion paper series / Centre for Economic Policy Research -- No.1752
ContributionsSmets, Frank., Centre for Economic Policy Research.
ID Numbers
Open LibraryOL17168200M

Appendix I: Math of SDF Model of Term Structure. Appendix II: Single-Factor Affine Models. 24 The Foreign Exchange Market. Aims. Exchange Rate Regimes. PPP and LOOP. Covered-Interest Parity, CIP. Uncovered Interest Parity, UIP. Forward Rate Unbiasedness, FRU. Real Interest Rate Parity. Summary. than the short bond. The expectations theory of the term structure states that et is constant over time, i.e. 8, = 8. Assuming expectations to be rational Vt + reflects only 'news' about the long rate. Thus, the joint hypothesis of rational expectations and the expectations theory of the term structure states that. Contents may have variations from the printed book or be incomplete or contain other coding. yields and the RVF 2 Theories of the term structure 3 Expectations hypothesis 4 Summary Chapter 21 The EH - From Theory to Testing 1 Alternative representations of the EH 2 VAR approach 3 Time varying term premium - VAR methodology 4 Summary Chapter. Survey data on interest rate expectations are used to separate the forward interest rate into an expected future rate and a term premium. These components are used to test separately two competing alternative hypotheses in tests of the term structure: that the expectations hypothesis does not hold, and that expected future long rates over- or.


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Exchange rate regimes and the expectations hypothesis of the term structure by Stefan Gerlach Download PDF EPUB FB2

EXCHANGE RATE REGIMES AND THE EXPECTATIONS HYPOTHESIS OF THE TERM STRUCTURE * by Stefan Gerlach and Frank Smets July Abstract This paper uses weekly data on short-term eurorates for ten countries for the period to document that the ability of the expectations hypothesis (EH) to account for movements in the term structure is Cited by: Downloadable (with restrictions).

This paper uses weekly data on short-term eurorates for ten countries for the period –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.

Additional Physical Format: Online version: Gerlach, Stefan, Exchange rate regimes and the expectations hypothesis of the term structure. Basle: Bank for. Exchange rate regimes and the expectations hypothesis of the term structure.

uses weekly data on short-term eurorates for ten countries for the period 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.

Unbiased Predictor: The notion that the current market price of a physical commodity (its cash price or currency) will be equal to its anticipated future price based on the market's forward rate.

An exchange rate regime is the system that a country’s monetary authority, -generally the central bank- adopts to establish the exchange rate of its own currency against other currencies. Each country is free to adopt the exchange-rate regime that it considers optimal, and will do so using mostly monetary and sometimes even fiscal policies.

The distinction amongst these exchange. The exchange rate regimes between the fixed ones and the floating ones. Band. There is only a tiny variation around the fixed exchange rate against another currency, well within plus or minus 2%.

For example, Denmark has fixed its exchange rate against the euro, keeping it very close to krone = 1 euro ( euro = 1 krone). Crawling peg. The exchange rate between two currencies may be determined in international foreign exchange markets or in a government office.

If an exchange rate — say, the yen–dollar rate — is determined in international foreign exchange markets based on the demand for and supply of the yen, then the markets determine the exchange rate. This situation [ ]. of the term structure and the exchange rate expectations in uence the current net demand for the currencies.

Thus the evolution path of the ex-change rate depends on the entire term structure. Secondly, expectation building is inevitably ambiguous if UIP is extended to the term structure.

Because of the non-linearities in the term structure equation the alternative definitions of the term premium cannot simultaneously hold given Jensen's Inequality.

See Bloch () and Juttner, Madden and Tuckwell (). Bloch, for instance, found that a version of the expectations hypothesis held in the short term.

This section examines the conditional expectations of the short rate and the predicted long rates under the linear and nonlinear models. First, the top three panels in Fig.

1 plot the conditional expectations of the future short-term rate 3- 6- and months ahead for different values of the current short rate. In all panels, the linear (nonlinear) model is. Downloadable.

This paper investigates the measurement of Exchange rate regimes and the expectations hypothesis of the term structure book interest rate policy and the effects of these expectations on the term structure of nominal interest is shown that, under the expectations hypothesis, the level of long-term interest rates depends on three factors: the level of the monetary policy interest rate, ie the steering rate; the spread between.

expectations." See John M. Culbertson, "The Term Structure of Interest Rates," Quarterly Journal of Economics, Novemberp. Meiselman, Term Structure of Interest Rates, p.

12, regards this and Hick-man's work as tests of nonexistent implications of the expectations hypothesis. Types of Exchange Rates Fixed Exchange Rate. A fixed exchange rate, also known as the pegged exchange rate, is “pegged” or linked to another currency or asset (often gold) to derive its value.

Such an exchange rate mechanism ensures the stability of the exchange rates by linking it to a stable currency itself. The liquidity premium theory has been advanced to explain the 3 rd characteristic of the term structure of interest rates: that bonds with longer maturities tend to have higher yields.

Although illiquidity is a risk itself, subsumed under the liquidity premium theory are the other risks associated with long-term bonds: notably interest rate risk and inflation risk.

The term structure of very short term rates: new evidence for the expectations hypothesis. Journal of Financial Econom –] in two directions: (1) we implement statistical tests designed to increase test power in this context; (2) more important, we assess the economic value of departures from the EH based on criteria of.

The Expectations Hypothesis ⁄ Antonios Sangvinatsosy University of Southern California Current Draft: Ma ⁄ I thank Aggie Moon for providing research assistantship. All errors are my own. yDepartment of Finance and Business Economics, Marshall School of Business, University of Southern Cali- fornia, Exposition Blvd, Hofiman HallLos Angeles, CA.

the expectations hypothesis of the term structure of interest rates and discusses maximum likelihood estimation subject to the cross-equation restrictions imposed by rational expectations. Empirical results and substantive conclu- sions are presented in section 4, with concluding discussion offered in section 5.

across the term structure. In particular, the mean overnight rate of is slightly higher than the mean one-week rate ofwhich turns out to be the lowest mean across the di⁄erent maturities. The mean three-month rate iswhich is approximately 3 bps higher than the mean overnight rate.

Bekaert et al () examined uncovered interest rate parity (UIRP) and the expectations hypotheses of the term structure (EHTS) at both short and long horizons using vector auto-regression (VAR. The term structure of interest rates reflects expectations of market participants about future changes in interest rates and their assessment of monetary policy conditions.

of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, vol. 87 (December ), pp.

; Robert J. Shiller, John Y. slope of the term structure almost always gives a forecast in the wrong direction for the short term change in the yields on longer bonds, but gives a forecast in the right direction for long term changes in short term rates ”.

The weak empirical support for the expectations hypothesis 2 has thus inspired numerous empirical studies. Modern Exchange Rate Regimes. Currently, most governments use one of three different exchange rate systems: Managed Floating Exchange Rate – This is the system that most developed nations use.

In this system, the currency is allowed to float against all other currencies thereby letting market forces determine the value of the currency. The integration of emerging economies with developed economies has changed the behaviour of interest rates and exchange rate fluctuation. The current study tries to analyse the implication of expectation hypothesis (EH) and term structures of interest rates between India and US.

Using vector auto regressive estimates, the study tries to test the dynamic. A test of the expectations theory of the term structure in the framework of a regime-switching VAR model for a change in the short rate and the short. Floating exchange rate regimes simply use the forces of the market to dictate their currency’s exchange rates.

Pegged Currencies. The monetary system of some nations, for example China, uses pegged exchange rate regimes which mean exchange rates are fixed to other currencies for a certain period of time. The expectations hypothesis of the term structure has been decisively rejected by a large empirical literature that spans several decades.

In this paper, using a newly constructed dataset of synthetic zero coupon bond yields, we show that evidence against the expectations hypothesis became very much weaker following the widespread acceptance of. The expectations hypothesis (EH) of the term structure of interest rates–the proposition that the long-term rate is determined by the market’s expectation of the short-term rate over the holding period of the long-term bond plus a (constant) risk premium–is one of the key economic principles that is at the core.

Expectations Hypothesis. One basic theory of the term structure of interest rates is that short-term and long-term interest rates are linked by the expectations hypothesis. This is best expressed using the one-year interest rate RS and the two-year interest rate RL. Kimbrough, K. “The Information Content of the Exchange Rate and the Stability of Real Output under Alternative Exchange Rate Regimes.” Journal of International Money and Finance 2 (April), pp.

27– CrossRef Google Scholar. Expectations hypothesis theories. Theories of the term structure of interest rates which include the pure expectations theory, the liquidity theory of the term structure, and the preferred habitat theory.

These theories hold that each forward rate equals the expected future interest rate for the relevant period. These three theories. Based on the expectations hypothesis of the term structure of interest rates if the slope of the term structure increased this most likely is because.

Their higher liquidity raises short term bond prices and lowers short term bond interest rate. You decide to quit your current job which pays $, to open a used book store.

You will. An empirical study of exchange rate regimes based on data compiled from member countries of the International Monetary Fund over the past thirty years. Few topics in international economics are as controversial as the choice of an exchange rate regime.

Since the breakdown of the Bretton Woods system in the early s, countries have adopted a wide variety of regimes. The Rational Expectations Hypothesis of the Term Structure, Monetary Policy, and Time-Varying Term Premia Michael Dotsey and Christopher Otrok Most empirical studies of the rational expectations hypothesis of the term structure (REHTS) generally find that the data offer little sup-port for the theory.1 In many cases this large body of empirical.

A depreciating exchange rate is usually thought to be on medium-term equilibrium. The RER is in “equilibrium” if it is consistent with internal Under the PPP hypothesis the real exchange rate should oscillate around a constant (or a trend): there can be short. The expectations hypothesis of the term structure of interest rates: The Brazilian case revisited.

Applied Economics Letters: Vol. 26, No. 8, pp. Exchange Rate Determination and Optimal Economic Policy Under Various Exchange Rate Regimes Dr. Eelke de Jong (auth.) Some characteristics of the floating exchange rate system The flexible exchange rate system has functioned far less satisfactorily than many anticipated inwhen the major industrialized countries decided to let their.

The single most important aspect of an exchange rate regime is the degree of flexibility. The matter is of course more complicated than a simple choice between fixed exchange rate and floating. One can array exchange rate regimes along a continuum, from most flexible to least, and grouped in three major categories: Floating corner Free float.

Exchange Rate Regimes: Classification and Consequences Atish Ghosh1 PDR IMF [email protected] Anne-Marie Gulde MAE IMF [email protected] Holger Wolf BMW Center for German and European Studies Georgetown University [email protected] 1 The paper is based on our forthcoming book, Exchange Rate Regime, Choices and Consequences, MIT.

R. G. King andA. Kurmann: Expectations and the Term Structure 53 Table 1 Decade Averages Short Rate Long Rate Spread s s 4 rather than what they say that they do.

Hence they have become called de facto exchange rate arrangements. The de facto classifications have rapidly become the new standard in research on exchange rate regimes. Hypotheses that had been tested using the de jure classification have been re-examined, and many results have been overturned.CHAPTER THE TERM STRUCTURE OF INTEREST RATES CHAPTER THE TERM STRUCTURE OF INTEREST RATES PROBLEM SETS.

1. In general, the forward rate can be viewed as the sum of the market’s expectation of the future short rate plus a potential risk (or ‘liquidity’) premium.

According to the expectations theory of the term structure.