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A learning hypothesis of the term structure of interest rates

Author

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  • Balázs Romhányi

    (Hungarian Ministry of Finance)

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.

Suggested Citation

  • Balázs Romhányi, 2005. "A learning hypothesis of the term structure of interest rates," Macroeconomics 0503001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0503001
    Note: Type of Document - pdf; pages: 42
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    More about this item

    Keywords

    term structure; interest rate; learning; uncertainty; monetary policy;
    All these keywords.

    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; Trading Volume; Bond Interest Rates

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