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

Georges Prat () and Remzi Uctum ()

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Abstract: We propose an augmented and dynamic forecast anchoring model to examine whether a group of rational forecasters coexists with or emerges beside 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.

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Date: 2018
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01697181
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Published in Applied Economics, Taylor & Francis (Routledge), 2018, 50, pp.6458-6480

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