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Term Structure Dynamics in a Monetary Economy with Learning

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  • Sadayuki Ono

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.

Suggested Citation

  • Sadayuki Ono, 2007. "Term Structure Dynamics in a Monetary Economy with Learning," Discussion Papers 07/29, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:07/29
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    More about this item

    Keywords

    Term structure of interest rates; Monetary equilibrium model; Uncertainty in parameters; Learning.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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