Decreasing Yield Curves in a Model with an Unknown Constant Growth Rate

Frank Riedel

Review of Finance, 2000, vol. 4, issue 1, 51-67

Abstract: The effect of incomplete information on the term structure of interest rates is examined in the framework of a pure exchange economy under uncertainty where aggregate output grows at a constant rate. If the growth rate is known, the term structure is flat. In contrast, the term structure is a decreasing curve when agents do not know the growth rate. Long term yields are less than the short rate and the yield of long term bonds is determined by the worst possible realizations of future short rates. JEL classification codes: D5, D9, E4, G1.

Date: 2000
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