TESTING THE TERM STRUCTURE OF INTEREST-RATES USING A STATIONARY VECTOR AUTOREGRESSION WITH REGIME SWITCHING

The expectations model of the term structure for US data on three- and six-month treasury bills for the period 1962(1)-1987(3) is explored. The analysis allows for the nonstationarity of the data, and for unobserved stochastic switches of regime, by estimating VARs in the yield spread and the change in the three-month rate which allow the time series processes to change between regimes. In contrast to other results for the expectations model, such as those of Hamilton (1988), Mankiw and Miron (1986), and others, we find that the data do not reject the model.