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Subjective Term Premia, Consumer Sentiment, and the Zero Lower Bound

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  • Josh Stillwagon

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    (Department of Economics, Trinity College)

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    Abstract

    Monthly interest rate forecasts from nearly 50 major banks are used to directly examine the expectations hypothesis of the term structure, for the US, UK, Switzerland, and Canada. Using polynomially cointegrated VARs, there is clear evidence of a time-varying risk premium which moves inversely with consumer sentiment and the level of, and/or change in, the interest rate. A one point fall in consumer sentiment or 1% fall in the interest rate appear to increase the premium by several basis points each, often estimated with t-values in the double or even triple digits!

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    File URL: http://internet2.trincoll.edu/repec/WorkingPapers2014/WP14-01.pdf
    File Function: First version, 2014
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    Bibliographic Info

    Paper provided by Trinity College, Department of Economics in its series Working Papers with number 1401.

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    Length: 38 pages
    Date of creation: Feb 2014
    Date of revision:
    Handle: RePEc:tri:wpaper:1401

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    Keywords: Expectations hypothesis; survey data; time-varying risk premium; consumer sentiment; zero lower bound; polynomial cointegration;

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