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A learning hypothesis of the term structure of interest rates

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Author Info
Balázs Romhányi (Hungarian Ministry of Finance)

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Abstract

Recent empirical results about the US term structure are difficult to reconcile with the classical hypothesis of rational expectations even if time-varying but stationary term premia are allowed for. A hypothesis of rational learning about the conditional variance of the log pricing kernel is put forward. In a simple, illustrative consumption-based asset pricing model the long-term interest rate turns out to have an economic meaning distinct from both price stability and full employment, namely to measure the market perception of aggregate level of future risk in the economy. Implications for economic modeling and monetary policy are explored.

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Paper provided by EconWPA in its series Macroeconomics with number 0503001.

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Length: 42 pages
Date of creation: 02 Mar 2005
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Handle: RePEc:wpa:wuwpma:0503001

Note: Type of Document - pdf; pages: 42
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Related research
Keywords: term structure; interest rate; learning; uncertainty; monetary policy;

Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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