Around and around: the expectations hypothesis

Article Abstract:

We show how to construct models of the term structure of interest rates in which the expectations hypothesis holds. McCulloch (1993) presents such a model, thereby contradicting an assertion by Cox, Ingersoll, and Ross (1981), but his example is Gaussian and falls outside the class of finite-dimensional Markovian models. We generalize McCulloch's model in three ways: (i) We provide an arbitrage-free characterization of the unbiased expectations hypothesis in terms of forward rates; (ii) we extend this characterization to a whole class of expectations hypotheses: and (iii) we show how to construct finite-dimensional Markovian and non-Gaussian examples. (Reprinted by permission of the publisher.)

Analysis, Markov processes, Rational expectations (Economics)

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A note on unanticipated money growth and interest rate surprises: Mishkin and Makin revisited

Article Abstract:

The relationship of money supply (and increases therein) and interest rate changes have been investigated by both John Makin and Fredric Mishkin, with opposing conclusions as the result. Makin determined that interest rate and money growth surprises are negatively related and significant, while Mishkin decided that interest rate and money growth surprises were positively related and significant. An analysis of this contradiction indicates that Mishkin is correct and that the conclusion reached by Makin was the result of an inappropriate restriction made by him on the data he investigated.

Research, Economic aspects, Money supply, Money market, Money markets

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