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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Hisasi Nakamura & Wataru Nozawa & Akihiko Takahashi, 2008. "Macroeconomic Implications of Term Structures of Interest Rates under Stochastic Differential Utility with Non-Unitary EIS," CIRJE F-Series CIRJE-F-603, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2008cf603
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    Cited by:

    1. Taiga Saito & Akihiko Takahashi, 2019. "A novel approach to asset pricing with choice of probability measures," CARF F-Series CARF-F-471, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Jan 2021.
    2. Taiga Saito & Akihiko Takahashi, 2021. "Supplementary file for "Sup-inf/inf-sup problem on choice of a probability measure by FBSDE approach (Forthcoming in IEEE Transactions on Automatic Control)"," CARF F-Series CARF-F-507, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    3. Taiga Saito & Akihiko Takahashi, 2021. "Supplementary File for "Sup-Inf/Inf-Sup Problem on Choice of a Probability Measure by FBSDE Approach"," CIRJE F-Series CIRJE-F-1160, CIRJE, Faculty of Economics, University of Tokyo.
    4. Akihiko Takahashi & Toshihiro Yamada, 2012. "An Asymptotic Expansion for Forward-Backward SDEs: A Malliavin Calculus Approach," CARF F-Series CARF-F-296, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Sep 2013.
    5. Misumi, Takashi & 三隅, 隆司 & Nakamura, Hisashi & 中村, 恒 & Takaoka, Koichiro & 高岡, 浩一郎, 2014. "Moral-Hazard Premium," Working Paper Series G-1-7, Hitotsubashi University Center for Financial Research.
    6. Souta Nakatani & Kiyohiko G. Nishimura & Taiga Saito & Akihiko Takahashi, 2019. "Online Appendix for Interest Rate Model with Investor Attitude and Text Mining," CIRJE F-Series CIRJE-F-1136, CIRJE, Faculty of Economics, University of Tokyo.
    7. Souta Nakatani & Kiyohiko G. Nishimura & Taiga Saito & Akihiko Takahashi, 2019. "Online Appendix for Interest Rate Model with Investor Attitude and Text Mining," CARF F-Series CARF-F-470, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    8. Taiga Saito & Akihiko Takahashi, 2019. "A Novel Approach to Asset Pricing with Choice of Probability Measures," CIRJE F-Series CIRJE-F-1131, CIRJE, Faculty of Economics, University of Tokyo.
    9. Souta Nakatani & Kiyohiko G. Nishimura & Taiga Saito & Akihiko Takahashi, 2020. "Interest Rate Model with Investor Attitude and Text Mining (Published in IEEE Access)," CARF F-Series CARF-F-479, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    10. Souta Nakatani & Kiyohiko G. Nishimura & Taiga Saito & Akihiko Takahashi, 2020. "Interest Rate Model with Investor Attitude and Text Mining," CIRJE F-Series CIRJE-F-1152, CIRJE, Faculty of Economics, University of Tokyo.
    11. Akihiko Takahashi & Toshihiro Yamada, 2012. "An Asymptotic Expansion for Forward-Backward SDEs; A Malliavin Calculus Aproach," CIRJE F-Series CIRJE-F-865, CIRJE, Faculty of Economics, University of Tokyo.

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