Macroeconomic Implications of Term Structures of Interest Rates under Stochastic Differential Utility with Non-Unitary EIS

Hisasi Nakamura, Wataru Nozawa and Akihiko Takahashi
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Hisasi Nakamura: Faculty of Economics, University of Tokyo
Akihiko Takahashi: Faculty of Economics, University of Tokyo

No CIRJE-F-603, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: This paper proposes a continuous-time term-structure model under stochastic differential utility with non-unitary elasticity of intertemporal substitution (EIS, henceforth) in a representative-agent endowment economy with mean-reverting expectations on real output growth and inflation. Using this model, we make clear structural relationships among a term structure of real and nominal interest rates, utility form and underlying economic factors (in particular, inflation expectation). Notably, we show that, if (1) the EIS is less than one, (2) the agent is comparatively more risk-averse relative to timeseparable utility, (3) short-term interest rates are pro-cyclical, and (4) the rate of expected inflation is negatively correlated with the rate of real output growth and its expected rate, then a nominal yield curve can have a low instantaneous riskless rate and an upward slope.

Pages: 44pages
Date: 2008-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-upt
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Macroeconomic Implications of Term Structures of Interest Rates Under Stochastic Differential Utility with Non-Unitary EIS (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2008cf603

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