Term Structure of Interest Rates under Recursive Preferences in Continuous Time

Hisashi Nakamura, Keita Nakayama and Akihiko Takahashi
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Hisashi Nakamura: Faculty of Economics, University of Tokyo
Keita Nakayama: Graduate School of Economics, University of Tokyo
Akihiko Takahashi: Faculty of Economics, University of Tokyo

No CIRJE-F-540, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper proposes a testable continuous-time term-structure model with recursive utility to investigate structural relationships between the real economy and the term structure of real and nominal interest rates. Under mean-reverting expectation on real output growth and inflation, this paper finds that, if interest rates tend to be high during economic booms, then a real yield curve slopes up when, and only when, late resolution is preferred strongly enough. Also, even when the real yield curve slopes down, the nominal yield curve may slope up when expected inflation is negatively correlated with the real output growth.

Pages: 32 pages
Date: 2008-01
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2008cf540

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