Testing The Expectations Hypothesis When Interest Rates Are Near Integrated
Nominal interest rates are unlikely to be generated by unit-root processes. Using data on short and long interest rates from eight developed and six emerging economies, the authors test the expectations hypothesis using cointegration methods under the assumption that interest rates are near integrated. If the null hypothesis of no cointegration is rejected, they then test whether the estimated cointegrating vector is consistent with that suggested by the expectations hypothesis. The results show support for cointegration in ten of the fourteen countries they consider, and the cointegrating vector is similar across countries. However, the parameters differ from those suggested by theory.