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Interest-Rate Models For Us And Uk With Mixed Inflationary Expectations. A Comparison With The Rational And The Adaptive Scheme

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Author Info
Mª Mar Sánchez (Universidad de Alicante)
Abstract

This paper presents a macro-econometric model for medium- and long-term nominal interest rates, assuming heterogeneous economic agents in the market that use different and limited sets of information. It also shows the empirical results obtained from US and UK data, comparing the performance of the model under mixed expectations with, respectively, the performance of the model under rational expectations and under a kind of adaptative expectation. The econometric problems arising in the mixed- and rational-expectation models are tackled by the generalized method of moments. The mixed-expectation model picks up the dynamics of market expectations better than both the rational-expectation model and the adaptative-expectation model, so that it provides the more reasonable model of interest-rate determination.

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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2002-05.

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Length: 26 pages
Date of creation: Jun 2002
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Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2002-05

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  1. Evans, Paul, 1985. "Do Large Deficits Produce High Interest Rates?," American Economic Review, American Economic Association, vol. 75(1), pages 68-87, March.
  2. Evans, Paul, 1987. "Do budget deficits raise nominal interest rates? : Evidence from six countries," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 281-300, September. [Downloadable!] (restricted)
  3. Hoelscher, Gregory, 1986. "New Evidence on Deficits and Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(1), pages 1-17, February. [Downloadable!] (restricted)
  4. Knot, Klaas, 1995. "On the Determination of Real Interest Rates in Europe," Empirical Economics, Springer, vol. 20(3), pages 479-500.
  5. Makin, John H, 1983. "Real Interest, Money Surprises, Anticipated Inflation and Fiscal Deficits," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 374-84, August. [Downloadable!] (restricted)
  6. Ignacio Mauleón & Mª Mar Sánchez, 2000. "Fundamentals Of The Us And The Uk Interest Rates Under The Rational Expectation Scheme," Working Papers. Serie AD 2000-20, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  7. Jyh-Lin Wu & Show-Lin Chen, 1998. "A Re-examination of Real Interest Rate Parity," Canadian Journal of Economics, Canadian Economics Association, vol. 31(4), pages 837-851, November. [Downloadable!] (restricted)
  8. Correia-Nunes, Jose & Stemitsiotis, Loukas, 1995. "Budget Deficit and Interest Rates: Is There a Link? International Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(4), pages 425-49, November.
  9. Frankel, Jeffrey A & Froot, Kenneth A, 1986. "Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists," The Economic Record, The Economic Society of Australia, vol. 0(0), pages 24-38, Supplemen.
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  10. Engle, Robert F & Hendry, David F & Richard, Jean-Francois, 1983. "Exogeneity," Econometrica, Econometric Society, vol. 51(2), pages 277-304, March. [Downloadable!] (restricted)
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  11. Evans, Paul, 1987. "Interest Rates and Expected Future Budget Deficits in the United States," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 34-58, February. [Downloadable!] (restricted)
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