Testing the expectations hypothesis of the term structure of interest rate: the case of Ghana

Abstract

This study examines the expectations hypothesis (EH) using data from Ghana. It tests the EH by using the long-short rate spread to predict future movements in short-term interest rates and the forward-spot spread to predict changes in the spot rate. It finds that the Ghanaian term structure partly contains information for future changes in the short-term interest rates though the relation is not one-to-one. It suggests that market participants and policymakers may have to be cautious in relying on the Ghanaian term structure for their various purposes such as the conduct of monetary policy and investment decisions.