Economic Uncertainty and Interest Rates
55 Pages Posted: 20 Jan 2016 Last revised: 10 May 2017
Date Written: January 8, 2016
Abstract
Asset-pricing models predict a strong connection between the real risk-free interest rate and the macroeconomy, but prior research finds little empirical support for the connection when examining expected growth. This paper documents a robust relation between the interest rate and macroeconomic uncertainty (i.e., conditional variance). Consistent with precautionary savings, high uncertainty is associated with a low interest rate using numerous data sources, time-periods, and measures. A relation between habit and the interest rate disappears after including uncertainty, and the relation is stronger using long-run uncertainty. The results imply that analyses of the interest rate without uncertainty are seriously incomplete.
Keywords: Interest Rate, Uncertainty, Risk Free Rate, Consumption, Growth
JEL Classification: G12, E43
Suggested Citation: Suggested Citation