The expectations hypothesis of the term structure: evidence for Germany

In this paper we examine the expectations hypothesis of the term structure (EHT) using a newly constructed monthly database of zero coupon bond yields from the German Government bond market. We use data at the short end of the maturity spectrum (maturities less than two years) and employ two approaches to predict future movements in shorter-term interest rates: one based on the yield spread, the other based on the forward-spot rate spread. We find that for the period considered, 1985:2-1994:12, both spreads contain substantial information for predicting future interest rate movements. Moreover, the results are, in general, consistent with the implications of the EHT, as far as the value of the coefficient of the spread is concerned. This means that in Germany the spread can be used as an important indicator for the conduct of monetary policy