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Do markets learn to rationally expect US interest rates? An anchoring approach

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  • Georges Prat

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Remzi Uctum

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

We propose an augmented and dynamic forecast anchoring model to examine whether a group of rational forecasters coexists with or emerges beside a group of forecasters employing heuristic rules. This model is consistent with the economically rational expectations theory. Using experts' 3-month and 10-year Treasury bill rate survey expectations at short and long horizons, we find that aggregate expectations fail to exhibit a learning process towards rationality. While forecasters essentially anchor their judgements to heuristics, a small proportion of agents rationally forecast the short term interest rate, possibly due to Federal Reserve's transparency practice in the conduct of monetary policy and forward guidance at the zero-lower bound.

Suggested Citation

  • Georges Prat & Remzi Uctum, 2018. "Do markets learn to rationally expect US interest rates? An anchoring approach," Post-Print hal-01697181, HAL.
    • Handle: RePEc:hal:journl:hal-01697181
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    Cited by:

    1. Prat, Georges & Uctum, Remzi, 2021. "Term structure of interest rates: Modelling the risk premium using a two horizons framework," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 421-436.

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