Economic Uncertainty and Interest Rates

Samuel M. Hartzmark

The Review of Asset Pricing Studies, 2016, vol. 6, issue 2, 179-220

Abstract: Asset pricing models predict a strong connection between the real risk-freeinterest rate and the macroeconomy, but prior research finds little empiricalsupport for the connection when examining expected growth. This paper documentsa robust relation between the interest rate and macroeconomic uncertainty (i.e.,conditional variance). Consistent with precautionary savings, high uncertaintyis associated with a low interest rate using numerous data sources, timeperiods, and measures. A relation between habit and the interest rate disappearsafter including uncertainty, and the relation is stronger using long-rununcertainty. The results imply that analyses of the interest rate withoutuncertainty are seriously incomplete.

JEL-codes: E43 G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:rasset:v:6:y:2016:i:2:p:179-220.

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