Learning About the Long Run

Farmer, Leland; Nakamura, Emi; Steinsson, Jón

doi:10.2139/ssrn.3968718

Cited by 6 publications

(13 citation statements)

References 40 publications

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“…Campbell and Shiller (1991) find that when the term spread is high, long-term rates are expected to fall, rather than rise, as the theory would suggest. However, these patterns are also consistent with the EH, under bounded rationality and learning (Sinha 2016;Farmer, Nakamura, and Steinsson 2023). Furthermore, economic agents are commonly assumed to operate in a stationary environment, where they quickly come to understand the long-run behavior of the economy.…”

Section: Introductionsupporting

confidence: 54%

“…The estimated model also exhibits meaningful deviations from full rationality. In fact, as in Sinha (2016) and Farmer, Nakamura, and Steinsson (2023), treating data generated from the model as observed yields (i.e., imposing the EH), would nonetheless lead an empirical researcher to frequently reject the EH using standard statistical tests.…”

Section: Introductionmentioning

confidence: 99%

“…Similarly, Cogley (2005) proposes a model of the term structure of interest rates based on a VAR with drifting coefficients and shows that the EH cannot be rejected in this environment. 5 More recently, using models of bounded rationality and learning, Sinha (2016) and Farmer, Nakamura, and Steinsson (2023) provide examples where the EH would be rejected in the data even when it holds in the true data generating process. Sinha (2016) explores a New Keynesian model with long-term government bonds and bounded rationality, where agents learn about the long-run evolution of the economy.…”

Section: Introductionmentioning

confidence: 99%

“…Sinha (2016) explores a New Keynesian model with long-term government bonds and bounded rationality, where agents learn about the long-run evolution of the economy. Farmer, Nakamura, and Steinsson (2023) propose a univariate trend-cycle model for the short-term interest rate. They show that their calibrated model matches existing stylized facts capturing departures from FIRE using survey forecasts out to four quarters ahead.…”

Section: Introductionmentioning

confidence: 99%

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Is There Hope for the Expectations Hypothesis?

Crump,

Eusepi,

Moench

2024

Staff Reports (Federal Reserve Bank of New York)

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Most macroeconomic models impose a tight link between expected future short rates and the term structure of interest rates via the expectations hypothesis (EH). While the EH has been systematically rejected in the data, existing work evaluating the EH generally assumes either full-information rational expectations or stationarity of beliefs, or both. As such, these analyses are ill-equipped to refute the EH when these assumptions fail to hold, fueling hopes for a “resurrection” of the EH. We introduce a model of expectations formation which features time-varying means and accommodates deviations from rationality. This model tightly matches the entire joint term structure of expectations for output growth, inflation, and the short-term interest rate from all surveys of professional forecasters in the U.S. We show that deviations from rationality and drifting long-run beliefs consistent with observed measures of expectations, while sizable, do not come close to bridging the gap between the term structure of expectations and the term structure of interest rates. Not only is the EH decisively rejected in the data, but model-implied short-rate expectations generally display, at best, only a weak co-movement with the forward rates of corresponding maturities.

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Section: Introductionsupporting

confidence: 54%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Is There Hope for the Expectations Hypothesis?

Crump,

Eusepi,

Moench

2024

Staff Reports (Federal Reserve Bank of New York)

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“…41 This is roughly consistent with the empirical evidence. For instance, Farmer, Nakamura, and Steinsson (2021) shows that professional forecasters have been consistently forecasting a flat path for short-term interest rates over the 1985-2015 period, despite the fact that short-term rates were a continuous downward path.…”

Section: Model Experimentsmentioning

confidence: 99%

Wealth Inequality in a Low Rate Environment

Gomez,

Gouin-Bonenfant

2024

ECTA

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We study the effect of interest rates on wealth inequality. While lower rates decrease the growth rate of rentiers, they also increase the growth rate of entrepreneurs by making it cheaper to raise capital. To understand which effect dominates, we derive a sufficient statistic for the effect of interest rates on the Pareto exponent of the wealth distribution: it depends on the lifetime equity and debt issuance rate of individuals in the right tail of the wealth distribution. We estimate this sufficient statistic using new data on the trajectory of top fortunes in the U.S. Overall, we find that the secular decline in interest rates (or more generally of required rates of returns) can account for about 40% of the rise in Pareto inequality; that is, the degree to which the super rich pulled ahead relative to the rich.

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A Reassessment of Monetary Policy Surprises and High-Frequency Identification

Bauer

Swanson

2023

NBER Macroeconomics Annual

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High-frequency changes in interest rates around FOMC announcements are an important tool for identifying the effects of monetary policy on asset prices and the macroeconomy. However, some recent studies have questioned both the exogeneity and the relevance of these monetary policy surprises as instruments, especially for estimating the macroeconomic effects of monetary policy shocks. For example, monetary policy surprises are correlated with macroeconomic and financial data that is publicly available prior to the FOMC announcement. We address these concerns in two ways: First, we expand the set of monetary policy announcements to include speeches by the Fed Chair, which essentially doubles the number and importance of announcements in our dataset. Second, we explain the predictability of the monetary policy surprises in terms of the "Fed response to news" channel of Bauer and Swanson ( 2021) and account for it by orthogonalizing the surprises with respect to macroeconomic and financial data. Our subsequent reassessment of the effects of monetary policy yields two key results: First, estimates of the high-frequency effects on financial markets are largely unchanged. Second, estimates of the macroeconomic effects of monetary policy are substantially larger and more significant than what most previous empirical studies have found.

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Learning About the Long Run

Cited by 6 publications

References 40 publications

Is There Hope for the Expectations Hypothesis?

Is There Hope for the Expectations Hypothesis?

Wealth Inequality in a Low Rate Environment

A Reassessment of Monetary Policy Surprises and High-Frequency Identification

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