VOLUME VI
WINTER 1998

SHORT TERM INTEREST RATES IN SPAIN
 
JOSÉ GARCÍA MONTALVO
IVIE y Universidad de Valencia
 
This article analyzes the evolution of short term interest rates in Spain. Several alternative theories have been proposed in the literature to capture the evolution of these rates. On the basis of continuous time dynamic models we obtain and estimate a discrete time specification using the generalized moments method. The analysis also considers the possibility of a structural break in the mean and the variance of the process caused by the entrance of Spain into the European Monetary System. The results, in contrast to the findings for other countries with respect to structural breaks in short term interest rates, show the importance of the entrance of Spain into the EMS on the generating process of short term these rates. The paper also analyzes the effect of the different models and parameter estimates on the valuation of bonds.
 
Keywords: short term interest rate, generalized moments method, continuous time processes.

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