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Macroeconomic Implications of Term Structures of Interest Rates under Stochastic Differential Utility with Non-Unitary EIS

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Author Info

  • Hisasi Nakamura

    (Faculty of Economics, University of Tokyo)

  • Wataru Nozawa

    (Graduate School of Economics, University of Tokyo)

  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

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    Abstract

    This paper proposes a continuous-time term-structure model under stochastic differential utility with non-unitary elasticity of intertemporal substitution (EIS, henceforth) in a representative-agent endowment economy with mean-reverting expectations on real output growth and inflation. Using this model, we make clear structural relationships among a term structure of real and nominal interest rates, utility form and underlying economic factors (in particular, inflation expectation). Notably, we show that, if (1) the EIS is less than one, (2) the agent is comparatively more risk-averse relative to timeseparable utility, (3) short-term interest rates are pro-cyclical, and (4) the rate of expected inflation is negatively correlated with the rate of real output growth and its expected rate, then a nominal yield curve can have a low instantaneous riskless rate and an upward slope.

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2008/2008cf603.pdf
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    Bibliographic Info

    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-603.

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    Length: 44pages
    Date of creation: Nov 2008
    Date of revision:
    Handle: RePEc:tky:fseres:2008cf603

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