The Term Structure and Time Series Properties of Nominal Interest Rates: Implications from Theory

Kevin Salyer ()

Journal of Money, Credit and Banking, 1990, vol. 22, issue 4, 478-90

Abstract: Restrictions on the time-series properties of one- and two-period nominal interest rates implied by a representative agent cash-in-advance model are derived and tested. Among these are the correlation of the difference between the forward rate and the one-period spot rate with the subsequent change in the one-period spot rate, the relative volatility of long and short rates, and the magnitude and sign of the term premium While the first two implications are corroborated by the data, the observed behavior of the term premium is dramatically at odds with the predictions of the model: For the data analyzed, the average term premium was positive while the model predicts that it should be negative. Copyright 1990 by Ohio State University Press.

Date: 1990
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:22:y:1990:i:4:p:478-90

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