Survey Evidence on the Rationality of Interest Rate Expectations

13 Pages Posted: 4 Jul 2004 Last revised: 20 Sep 2010

See all articles by Benjamin M. Friedman

Benjamin M. Friedman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: December 1980

Abstract

An analysis of predictions of six interest rates over 3-months-ahead and 6-months-aheadhorizons, surveyed regularly over eight years, casts doubt on the hypothesis that market participants' expectations are 'rational' in Muth's sense. Tests show that the survey respondents did not make unbiased predictions, that (especially for the 6-months-ahead predictions) they did not efficiently exploit the information contained in past interest rate movements, that their respective 3-months-ahead and 6-months-ahead predictions failed to be consistent in the sense required for 'rationality', and that (for long-term but not short-term interest rates) their predictions failed to exploit efficiently the information contained in common macroeconomic and macro-policy variables other than the money stock.

Suggested Citation

Friedman, Benjamin M., Survey Evidence on the Rationality of Interest Rate Expectations (December 1980). NBER Working Paper No. w0261. Available at SSRN: https://ssrn.com/abstract=260452

Benjamin M. Friedman (Contact Author)

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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