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Term Structure Dynamics in a Monetary Economy with Learning

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  • Sadayuki Ono
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    Abstract

    This paper investigates an equilibrium model of the term structure of nominal interest rates on default-free, zero coupon bonds. In a pure exchange economy with incomplete information, a representative agent is unable to observe the expected growth rates of both exogenous real output and money supply and, therefore, engages in dynamic Bayesian inference. The dependence of term premia on beliefs allows the model to introduce a GARCH property, which interacts with the volatility of the macro variables. In particular, the volatility of excess returns is inversely related to noise in the macro variables, implying that erratic monetary policy may reduce uctuations in interest rates.

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    Bibliographic Info

    Paper provided by Department of Economics, University of York in its series Discussion Papers with number 07/29.

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    Date of creation: Oct 2007
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    Handle: RePEc:yor:yorken:07/29

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    Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
    Phone: (0)1904 323776
    Fax: (0)1904 323759
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    Web page: http://www.york.ac.uk/economics/
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    Keywords: Term structure of interest rates; Monetary equilibrium model; Uncertainty in parameters; Learning.;

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