"Global Factors, International Spillovers, and the Term Structure of Interest Rates: New Evidence for Asian Countries"

This paper assesses the validity of the Expectations Hypothesis of the Term Structure of interest rates (EHTS) providing new evidence about the role of common global factors. Our panel data approach allows for structural breaks in the long-run equilibrium relationship driving the term structure, and analyzes the spillover effects from unconventional monetary policies recently implemented by major industrialized countries. Focusing on four Asian economies (Malaysia, Philippines, Singapore, South Korea) we show that, accounting for the role of global liquidity factors, parameters restrictions associated with the EHTS are not rejected, even after a regime-shift occurring at the end of 2005. We also document relevant discrepancies in the short-run dynamics of long-term interest rates, strictly related to some structural differences between these Asian countries in terms of the “impossible trinity” between monetary independence, financial openness and exchange rate stability.