Finite Horizons, Infinite Horizons, and the Real Interest Rate

Paul Evans

Economic Inquiry, 1992, vol. 30, issue 1, 14-28

Abstract: Using an overlapping-generations model in which households may have either finite or infinite horizons, the author derives the implications of each horizon for the steady-state real interest rate. He then formulates an econometric model of the steady-state real interest rate and devises tests that can distinguish between finite and infinite horizons. These tests are applied to annual and quarterly U.S. data, which span the period 1875-1988. The results are inconsistent with finite horizons and broadly consistent with infinite horizons. Copyright 1992 by Oxford University Press.

Date: 1992
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