Term structure and interest rate stabilization policies in the Greenspan era

Abstract

Previous studies attribute the failure of the expectations theory, using the 6-3 month Treasury bill spread, to the Federal Reserve's commitment to stabilizing interest rates. We …nd that with the advent of Greenspan, this spread predicts future changes in the short rate in the United States. This success can be explained by interest rate smoothing and greater transparency by the Fed. By enhancing the management of market expectations and reducing uncertainty, the central bank improves interest rate predictability and gains credibility from the market, as lower term premia suggest.Jel classi…cation: E43; E52.