Uncertainty on monetary policy and the expectations model of the term structure of interest rates

In this paper we jointly estimate a forward-looking reaction function for the 3-month rate along with a term structure relationship linking the 6-month interest rates to current and expected future 3-month rates. In our empirical model, the response of the 6-month interest rates to current and future 3-month interest rates is allowed to depend on uncertainty on monetary policy. The expectations theory cannot be rejected in periods of low uncertainty on monetary policy. (C) 2001 Elsevier Science BN. All rights reserved.