Expectations and the behaviour of Spanish treasury bill rates

Rational Expectations models are tested here under the standard assumptions of the Expectations Hypothesis (EH) of interest rates. We examine the theoretical unbiasedness of the spread of interest rates by predicting changes in the shorter spot rates. Unit root tests are applied and VAR systems are specified as a framework to apply Johansen's Maximum Likelihood Cointegration Analysis. Homogeneity and exogeneity tests are also carried out. Finally, we provide some Vector Error Correction Models (VECM) to determine the significance of the main assertions of the EH. Our VECM are coherent with the EH. We conclude that, by providing stability and strengthening the monetary transmission mechanism, the Spanish Treasury bills played a very relevant role in the monetary policy applied in Spain in order to enter the EMU.