Abstract

Are Interest Rate Prognoses of Financial Market Experts Rational?

A analysis of survey-based interest rate expectations of financial market experts does not confirm the rational expectations theory according to Muth. It is true that survey respondents’ errors in interest rate prognoses are not attributable to errors in forecasting interest-relevant variables, but to deficient knowledge of factual operational relations between the dollar rate and/or money supply growth on the one hand and the formation of interest rates on the other. The respondent financial market experts have evidently not succeeded in quantifying the (varying) strength of the impact of these variables on the supply and demand behaviour of the different groups of investors and issuers and, thus, on the formation of interest rates. The result of this empirical analysis can be substantiated by structural expectations theories as well as the possible occurrence of “irrational bubbles”.