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 unobs erved stochastic switches of regime, by estimating VARs in the yield s pread and the change in the three-month rate which allow the time seri es processes to change between regimes. In contrast to other results f or the expectations model, such as those of Hamilton (1988), Mankiw an d Miron (1986), and others, we find that the data do not reject the mo del.