Term Structure and Interest Rate Stabilization Policies: New Evidence

Abstract

Previous studies impute the failure of the expectations theory, using 6 and 3-month Treasury bill spread, to the Fed.s commitment to stabilize interest rates.We get that from Greenspan tenure on, that spread predicts future changes in the short rate in the United States. This success is ascribed to improved interest rates predictability achieved by the Fed which, as well as enhancing the management of market expectations, has reduced uncertainty acquiring credibility form the market (now asking for lower term premia).