Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/212050
Authors: 
Ravenna, Federico
Seppälä, Juha
Year of Publication: 
2006
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 25/2006
Publisher: 
Bank of Finland, Helsinki
Abstract: 
We study the rejection of the expectations hypothesis within a New Keynesian business cycle model.Earlier research has shown that the Lucas general equilibrium asset pricing model can account for neither sign nor magnitude of average risk premia in forward prices, and is unable to explain rejection of the expectations hypothesis.We show that a New Keynesian model with habitformation preferences and a monetary policy feedback rule produces an upwardsloping average term structure of interest rates, procyclical interest rates, and countercyclical term spreads.In the model, as in U.S. data, inverted term structure predicts recessions.Most importantly, a New Keynesian model is able to account for rejections of the expectations hypothesis.Contrary to earlier work, we identify systematic monetary policy as a key factor behind this result.Rejection of the expectation hypothesis can be entirely explained by the volatility of just two real shocks which affect technology and preferences.
Subjects: 
term structure of interest rates
monetary policy
sticky prices
habit formation
expectations hypothesis
JEL: 
E43
E44
G12
Persistent Identifier of the first edition: 
ISBN: 
952-462-327-7
Document Type: 
Working Paper

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