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

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  • Salyer, Kevin D

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.

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  • Salyer, Kevin D, 1990. "The Term Structure and Time Series Properties of Nominal Interest Rates: Implications from Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(4), pages 478-490, November.
    • Handle: RePEc:mcb:jmoncb:v:22:y:1990:i:4:p:478-90
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    Cited by:

    1. Geromichalos, Athanasios & Herrenbrueck, Lucas M. & Salyer, Kevin D., 2016. "A search-theoretic model of the term premium," Theoretical Economics, Econometric Society, vol. 11(3), September.
    2. Geromichalos, Athanasios & Herrenbrueck, Lucas M. & Salyer, Kevin D., 2016. "A search-theoretic model of the term premium," Theoretical Economics, Econometric Society, vol. 11(3), September.
    3. Chung, Kyuil, 2009. "Does the liquidity effect guarantee a positive term premium?," Economic Modelling, Elsevier, vol. 26(5), pages 893-903, September.
    4. Martin Meier & Burkhard Schipper, 2014. "Bayesian games with unawareness and unawareness perfection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(2), pages 219-249, June.
    5. Xu, Yuan, 2015. "Robustness to model uncertainty and the nominal term premium puzzle," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 124-137.

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