Do markets learn to rationally expect US interest rates? An anchoring approach

Georges Prat and Remzi Uctum

Applied Economics, 2018, vol. 50, issue 59, 6458-6480

Abstract: We propose an augmented and dynamic forecast anchoring model to examine whether a group of rational forecasters coexists with or emerges besides a group of forecasters employing heuristic rules. This model is consistent with the economically rational expectations theory. Using experts’ 3-month and 10-year Treasury bill rate survey expectations at short and long horizons, we find that aggregate expectations fail to exhibit a learning process towards rationality. While forecasters essentially anchor their judgements to heuristics, a small proportion of agents rationally forecast the short-term interest rate, possibly due to Federal Reserve’s transparency practice in the conduct of monetary policy and forward guidance at the zero lower bound.

Date: 2018
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DOI: 10.1080/00036846.2018.1486024

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