This paper employs data on short and long
interest rates for the G-10 countries, Australia, Austria and Spain to assess
the expectations hypothesis (EH) of the term structure, using the
Campbell-Shiller (1987, 1991) methodology. Although the EH is rejected in
several countries, in all countries actual and theoretical long interest rates
do move closely over time. This finding suggests that, at least from a monetary
policy perspective, it is appropriate to view long interest rates as determined
largely by expectations held by financial market participants concerning the
future path of short term interest rates.
The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS or its member central banks.