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Economic Uncertainty and Interest Rates

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  • Samuel M. Hartzmark

Abstract

Asset pricing models predict a strong connection between the real risk-freeinterest rate and the macroeconomy, but prior research finds little empiricalsupport for the connection when examining expected growth. This paper documentsa robust relation between the interest rate and macroeconomic uncertainty (i.e.,conditional variance). Consistent with precautionary savings, high uncertaintyis associated with a low interest rate using numerous data sources, timeperiods, and measures. A relation between habit and the interest rate disappearsafter including uncertainty, and the relation is stronger using long-rununcertainty. The results imply that analyses of the interest rate withoutuncertainty are seriously incomplete.

Suggested Citation

  • Samuel M. Hartzmark, 2016. "Economic Uncertainty and Interest Rates," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 6(2), pages 179-220.
    • Handle: RePEc:oup:rasset:v:6:y:2016:i:2:p:179-220.
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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