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Do markets learn to rationally expect US interest rates? An anchoring approach

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  • Georges Prat
  • Remzi Uctum

Abstract

We propose an augmented and dynamic forecast anchoring model to examine whether a group of rational forecasters coexists with or emerges besides a group of forecasters employing heuristic rules. This model is consistent with the economically rational expectations theory. Using experts’ 3-month and 10-year Treasury bill rate survey expectations at short and long horizons, we find that aggregate expectations fail to exhibit a learning process towards rationality. While forecasters essentially anchor their judgements to heuristics, a small proportion of agents rationally forecast the short-term interest rate, possibly due to Federal Reserve’s transparency practice in the conduct of monetary policy and forward guidance at the zero lower bound.

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  • Georges Prat & Remzi Uctum, 2018. "Do markets learn to rationally expect US interest rates? An anchoring approach," Applied Economics, Taylor & Francis Journals, vol. 50(59), pages 6458-6480, December.
    • Handle: RePEc:taf:applec:v:50:y:2018:i:59:p:6458-6480
    DOI: 10.1080/00036846.2018.1486024
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    Cited by:

    1. Helder Ferreira de Mendonça & João Pedro Neves Maia, 2022. "Interest rate expectations based on Taylor rule versus central bank’s survey: which performs better in a large emerging economy?," Applied Economics, Taylor & Francis Journals, vol. 54(39), pages 4532-4544, August.
    2. Prat, Georges & Uctum, Remzi, 2021. "Term structure of interest rates: Modelling the risk premium using a two horizons framework," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 421-436.

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