British Academy: The UK's National Academy for the Humanities and Social Sciences
13TH BRITISH ACADEMY POSTDOCTORAL FELLOWSHIP SYMPOSIUM
Abstract
Forecasting interest rates
Dr Roland Meeks
The state of the economy and interest rates are intimately linked. Policymakers in central banks such as the Bank of England and U.S. Federal Reserve exercise control over short term interest rates in order to influence the future path of Gross Domestic Product and inflation. At the same time, macroeconomic factors influence interest rates by shaping financial market views on future policy actions, and by changing the compensation required to bear risk.
In this talk I report on an innovative approach to the practical problem of modelling and forecasting the interest rates on bonds of many different maturities, which is often referred to as the term structure of interest rates, or simply the yield curve. An approach to modelling the dynamic evolution of the term structure is explained, and related to alternative approaches, including the classic expectations theory of the term structure, which would be true in a world of certainty. In a world of risk, financial market participants demand compensation for holding bonds, which may change over time in a predictable way. The findings of this research point to the important role played by this factor. I conclude by outlining some implications for macroeconomics.
Dr Roland Meeks read Economics at the University of Warwick, where he went on to complete an M.Sc. after a spell as a City analyst. He later took a D.Phil. in Economics from Nuffield College, Oxford, where he has held a British Academy Postdoctoral Fellowship since 2004. His research deals with the linkages between financial markets and macroeconomic performance.