A GARCH approach to model short‐term interest rates: Evidence from Spanish economy

This paper focuses on GARCH modelling of the nominal short‐term interest rates of the Spanish government three‐year bonds. This methodology allows an ex‐ante approximation to this variable which proves to be a valuable alternative against econometric specifications that imply a homoscedastic error term. Then, real short‐term interest rates are estimated by employing the reduced Fisher equation. Eventually, the results obtained are compared with the observed values of the real time‐series in order to measure their accuracy.