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Asset Prices and Monetary Policy$
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John Y. Campbell

Print publication date: 2008

Print ISBN-13: 9780226092119

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226092126.001.0001

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Learning, Macroeconomic Dynamics, and the Term Structure of Interest Rates

Learning, Macroeconomic Dynamics, and the Term Structure of Interest Rates

(p.191) 5 Learning, Macroeconomic Dynamics, and the Term Structure of Interest Rates
Asset Prices and Monetary Policy

Hans Dewachter

Marco Lyrio

University of Chicago Press

This chapter builds and estimates a macroeconomic model that includes learning. Learning was introduced in the model by assuming that agents do not believe in time-invariant inflation targets nor in constant equilibrium real rates. Given these priors, the optimal learning rule was derived in terms of a Kalman gain updating rule. The results show that including learning improves the fit of the model independently of the type of information included in the measurement equation. Although learning models improve on the rational expectations models, they are not fully satisfactory. Autocorrelation in the errors was found to be significant. Introducing learning in a standard New Keynesian model generated sufficiently volatile stochastic endpoints to fit the variation in long-maturity yields and in surveys of inflation expectations. The learning model, therefore, complements the current macrofinance literature linking macroeconomic and term structure dynamics.

Keywords:   macroeconomic model, learning, inflation, interest rates, Kalman gain updating rule, Keynesian model, long-maturity yields, term structure

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