Term Structure Dynamics in a Monetary Economy with Learning

This paper investigates a general-equilibrium asset pricing model of the term structure of nominal interest rates. In a pure exchange economy with incomplete information, investors are unable to observe the expected growth rates of both exogenous real output and money supply and, therefore, engage in dynamic Bayesian inference. The dependence of term premia on beliefs allows the model to introduce a GARCH property, which interacts with the volatility of the macro variables. In particular, the volatility of excess returns is inversely related to noise in the macro variables, implying that their erratic movements may reduce uctuations in interest rates. JEL Classi cation: G12, E43, D83.