Learning, Macroeconomic Dynamics and the Term Structure of Interest Rates

49 Pages Posted: 14 Jul 2006

See all articles by Hans Dewachter

Hans Dewachter

Catholic University of Leuven (KUL) - Department of Economics; Erasmus Research Institute of Management (ERIM)

Marco Lyrio

Insper Institute of Education and Research

Date Written: April 2006

Abstract

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.

Suggested Citation

Dewachter, Hans and Lyrio, Marco, Learning, Macroeconomic Dynamics and the Term Structure of Interest Rates (April 2006). NBER Working Paper No. C0010, Available at SSRN: https://ssrn.com/abstract=913303

Hans Dewachter (Contact Author)

Catholic University of Leuven (KUL) - Department of Economics ( email )

Center for Economic Studies
Naamsestraat 69
Leuven, B-3000
Belgium
+0032 16 326859 (Phone)
+0032 16 326796 (Fax)

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Marco Lyrio

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

HOME PAGE: http://www.insper.edu.br/en/faculty-and-research/marco-lyrio

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