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To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jeconom.2005.01.019 Byline: Andrea Carriero (a), Carlo A. Favero (a)(b), Iryna Kaminska (a) Abstract: In this paper we develop on the VAR framework, originally proposed by Campbell and Shiller (J. Political Econom 95 (1987) 1062) to evaluate the Expectations Theory, along three dimensions: the use of a testing method based on a real-time procedure, the measurement of the risk premium, the specification of the implicit monetary policy maker's reaction function. We use financial factors and macroeconomic information to construct a test of the theory based on simulating investors' effort to use the model in 'real-time' to forecast future monetary policy rates. The application of our approach to a monthly sample of US data from the eighties onward leads us to conclude that the deviation from the ET are very rarely significant and that fluctuations of risk premia are not large. Author Affiliation: (a) IGIER, Bocconi University, Via Salasco 5, Milan 20124, Italy (b) CEPR, 90-98 Goswell Road, London EC1V 7RR, UK

In this paper we develop on the VAR framework, originally proposed by Campbell and Shiller (J. Political Econom 95 (1987) 1062) to evaluate the Expectations Theory, along three dimensions: the use of a testing method based on a real-time procedure, the measurement of the risk premium, the specification of the implicit monetary policy maker's reaction function. We use financial factors and macroeconomic information to construct a test of the theory based on simulating investors' effort to use the model in 'real-time' to forecast future monetary policy rates. The application of our approach to a monthly sample of US data from the eighties onward leads us to conclude that the deviation from the ET are very rarely significant and that fluctuations of risk premia are not large. JEL classification: E43; E44; E47 Keywords: Expectations Theory; Macroeconomic information in finance