A learning hypothesis of the term structure of interest rates

Balázs Romhányi

Macroeconomics from EconWPA

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.

Keywords: term structure; interest rate; learning; uncertainty; monetary policy (search for similar items in EconPapers)
JEL-codes: D8 E4 E5 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fin, nep-mac and nep-mon
Date: 2005-03-02
Note: Type of Document - pdf; pages: 42
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0503001

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