Economic Uncertainty and Interest Rates

55 Pages Posted: 20 Jan 2016 Last revised: 10 May 2017

See all articles by Samuel M. Hartzmark

Samuel M. Hartzmark

Boston College - Carroll School of Management

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

Hartzmark, Samuel M., Economic Uncertainty and Interest Rates (January 8, 2016). Available at SSRN: https://ssrn.com/abstract=2717869 or http://dx.doi.org/10.2139/ssrn.2717869

Samuel M. Hartzmark (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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