LONG-RUN RISK AND MONEY MARKET RATES: AN EMPIRICAL ASSESSMENT

Stefano d'Addona

Macroeconomic Dynamics, 2017, vol. 21, issue 4, 1096-1117

Abstract: Using postwar U.S. data, I study the implied interest rates in a simple long-run risk (LRR) model. Empirical estimates show that, as in standard consumption-based models with power utility preferences, the movements of the implied risk-free rate are entirely determined by the variations of expected consumption growth. This leads to a negative relationship between LRR Euler equation rates and money market rates. Nevertheless, when the low-frequency movements of consumption growth are accounted for, the long-run component of consumption growth is a key element to partially capture the countercyclical variations of the money market rates.

Date: 2017
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