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Learning, Macroeconomic Dynamics and the Term Structure of Interest Rates

Learning, Macroeconomic Dynamics and the Term Structure of Interest Rates PDF Author: Hans Dewachter
Publisher:
ISBN:
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Languages : en
Pages : 49

Book Description
We present a macroeconomic model in which agents learn about the central bank's inflation target and the output-neutral real interest rate. We use this framework to explain the joint dynamics of the macroeconomy, and the term structures of interest rates and inflation expectations. Introducing learning in the macro model generates endogenous stochastic endpoints which act as level factors for the yield curve. These endpoints are suffciently volatile to account for most of the variation in long-term yields and inflation expectations. As such, this paper complements the current macro-finance literature in explaining long-term movements in the term structure without reference to additional latent factors.
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