Term Structure Dynamics in a Monetary Economy with Learning

Sadayuki Ono

Discussion Papers from Department of Economics, University of York

Abstract: This paper investigates an equilibrium model of the term structure of nominal interest rates on default-free, zero coupon bonds. In a pure exchange economy with incomplete information, a representative agent is unable to observe the expected growth rates of both exogenous real output and money supply and, therefore, engages in dynamic Bayesian inference. The dependence of term premia on beliefs allows the model to introduce a GARCH property, which interacts with the volatility of the macro variables. In particular, the volatility of excess returns is inversely related to noise in the macro variables, implying that erratic monetary policy may reduce uctuations in interest rates.

Keywords: Term structure of interest rates; Monetary equilibrium model; Uncertainty in parameters; Learning. (search for similar items in EconPapers)
JEL-codes: D83 E43 G12 (search for similar items in EconPapers)
Date: 2007-10
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:07/29

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