The term structure of interest rates when the growth rate is unobservable
AbstractThe effect of incomplete information on the term structure of interest rates is examined in the framework of a pure exchange economy under uncertainty. When the growth rate of the aggregate endowment is known, the term structure is flat and deterministic. When agents do not observe the (constant) growth rate, interest rates are stochastic and the term structure turns out to be linearly decreasing. As a possible explanation of this astonishing fact, we suggest that rational and risk-averse investors consider long-term bonds as a good hedge against unfavorable realizations of the growth rate. --
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Bibliographic InfoPaper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 1997,78.
Date of creation: 1997
Date of revision:
Term Structure of Interest Rates; Incomplete Information;
Find related papers by JEL classification:
- D5 - Microeconomics - - General Equilibrium and Disequilibrium
- D9 - Microeconomics - - Intertemporal Choice
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- G1 - Financial Economics - - General Financial Markets
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